Punchinello's Chronicles

February 3, 2011

What are Market Fundamentals?

Filed under: Word of the Day — Punchinello @ 3:01 am
Tags: , , , , ,

Whenever you ad an “-al” to a word, you’re hoping to make the word mean “in the nature of” or “characteristic of.” So we know what music means, right? It’s all that stuff you hear coming out of the radio. When we make it music-al, we hope to mean that something is “a whole lot like” music. It’s “in the nature of being like music.” See?

Alright, so what does fundament mean? It’s the bottom (literally, your butt) and the base. When something is fundament-al, it’s in the nature of being at the very bottom of something. Since we’re talking about concepts, logic and argument when we discuss economics, “fundamental” refers to the most basic premises, along with the very bottom of the cause-and-effect chain. What are the most basic components of a market?

Markets depend on business. That’s why we call it a market. Long ago, a market was a place where people went to sell things and others went to buy things. Many times the market was located within the walls of a city or a castle keep. The kings and lords who owned the towns or castles learned that they could charge a fee to walk through the gate. Sellers had to pay to have a stall or sell their stuff, and buyers had to pay a fee to get into the market.

We still have markets like that, just about everywhere. We also have online markets like eBay, Bonanzle, Craig’s List and so forth. And people often still have to pay a fee of some sort. But “The Market” we talk about in the economic news is a little more abstract. It’s the overall combination of all the ways in which people buy and sell anything in the world. We have oil markets, commodity markets, the job market and the housing market. But we also have the equities market, loans and mortgage markets, interest markets, and financial markets.

So what’s all this about fundamentals? How come they matter? What are they, and why do we even care?

The reason we should all care is because we’re being told that The Recession is Over! We’re being told that “the markets” all are looking up. We’re being told that manufacturing is picking up, jobs are being created, prices are holding steady, and people are buying houses. We’re being told that because The Dow is now over 12,000 for the first time in two years, Happy Days are Here Again! Just like in the 1920s.

How do you know if this is all true? Can you tell what’s what when everyone in the news business is telling you that things are getting better? Why do some people say we’re Recovering (from the Recession), and others say that we’re in the starting phase of the Great World Depression?

It comes down to these fundamentals.

One of the key fundamentals is that some THING has to be made, grown, created or otherwise put together in order for some ONE to buy that thing. Another key fundamental is that someone needs WORK to be completed in order for those things to be put on the market and sold.

A slightly more complicated fundamental is that some ONE knows something you don’t know, and YOU have to pay money in order to find out about it. For example, a doctor knows a lot about your body. You can’t see out of one eye, so you go to the doctor to find out why you can’t see, and whether anyone can do something to make it better. That’s a service, and is part of the service “industry” (market).

What do we make nowadays? What do YOU make? What do YOU know that people pay you money to learn?

Moving right along with that making and knowing stuff, there’s the idea that no single person can make everything or know everything. Well, except for me: I know everything and I’m, indeed, a legend in my own mind. But setting that aside for the moment (or until I’m crowned Emperor of the World), we often need some help. We have work to do, and we need help to get all that work accomplished.

A job is fundamentally work. You have something you need accomplished but you can’t do it yourself. So you pay money or trade something with someone else and they do the task. Maybe it’s something you don’t like, like mowing a lawn. Maybe it’s something you don’t know how to do, like fixing a broken pipe. Maybe you just need help because you don’t have the time to finish all the tasks, like when you need help making 10 dozen cookies in time for the bake sale.

One way or another, real things have to be made, real work has to be done, real tasks have to be accomplished, and real services have to be rendered. That’s the way things work in the real world.

But we don’t live in the real world, these days! No, we live in the statistical world of the Bureau of Labor Statistics, lovingly known as the BLS. These are the people in The Government who tell us what’s going on by looking at lots of numbers. Do those people do actual work?

Yes, they do. Most of us don’t know that much about statistics and numbers. We don’t have the time, energy, knowledge or resources to gather all the numbers involving work, jobs, manufacturing and so on. Actually; neither does the BLS. So they gather a “sample” of all those numbers, then take a guess at what the rest of the world is doing.

“The DOW is up on news that Egypt is exploding into revolution.” That’s the kind of idiotic headline you’ll read, then say to yourself, “Well, I guess the economy must be getting better. The DOW is up! That’s a good thing! My father told me so, and I believe whatever my father tells me to believe.”

Did you know that right now, the single biggest investors in the DOW are the Federal Reserve (Central Bank of America), and massive investment companies like Goldman Sachs? What about all those moms and dads, grandmas and grandpas? What about those little European retired soldiers, whose entire pensions are invested?

No, they don’t exist. Not any more. Well, they actually exist as people, but no, their money isn’t involved.

And what about all those taxes you’re paying (if you’re working)? Aren’t all those tax dollars going to fund the stimulus, bail-outs, and entitlements? Uh…no, they’re not. The United States takes in around $2.16 trillion dollars in tax money. We have an on-the-books deficit of $14 trillion dollars. We spend around $45-billion a month just to cover the minimum monthly payment on all our debts.

When you factor in the military, basic government services and basic public functions, that $2.16 trillion dollars pretty much disappears by the end of January. YOUR tax money is gone before it arrives in Washington. YOU aren’t funding a damn thing, when it comes to all this other spending (like Social Security, Medicare, Pensions, Medicaid, and so on).

But…you heard on the radio that YOU, The Taxpayer will be paying all this money for GM, the public unions, and so forth, right? Nah…don’t worry about it. None of that money actually exists.

Fundamentally, in order to have real money we have to have real products, real services, and real work. In order to have real work, we fundamentally have to have real people with too little time or too little knowledge. Do we have that? How much real stuff are we actually making?

Another fundamental is the concept of value. Let’s say that I have a 15-inch tire for a 1995 Ford van. I come to you and ask if you’d like to buy it. I tell you it’s a terrific deal, and I’ll sell it to you for $50.

Your first question might be, “Why the hell would I want an old tire? I drive a Toyota compact car!” Another question might be, “Why should I pay you $50 for a stupid tire?”

In other words, my tire has no value to you whatsoever. Ah, but what about intrinsic value? Isn’t there something about the very nature of the tire that makes it valuable? Well sure, the rubber. IF you want to melt it down, IF you have a way to recycle that melted rubber, and IF you produce something out of that rubber. Otherwise, it has no value.

Something is valuable ONLY if someone else wants to buy or possess that something. A “thing” is only worth what someone will pay for that thing. Are you willing to pay $250,000 for a house tomorrow afternoon? How about $800,000?

We hear all sorts of statistics about houses and how much they’re worth — how valuable they are. It seems not that many people think a house is all that valuable, right at the moment. Particularly those people who don’t have any money! If nobody is paying to buy houses, then they become less and less valuable.

What about malls and strip malls? How about downtown office buildings? What about all that commercial real estate property? Isn’t that still valuable? How many stores have closed in your neighborhood? Is anyone running to fill those empty stores with real stuff?

Talking with someone who believes that the overall economy is bad and getting worse, we say they’re a “bear.” Someone who believes the economy is getting better and will be back to normal soon, we say they’re a “bull.” Are you bullish or bearish? On what basis? On what foundation? What fundamentally do you see about the economy to support your feeling?

For thousands of years, people have used gold and silver as real money. We can look at the price of a piece of gold or silver in terms of paper money and determine the fundamental value of paper money. The more paper money it costs to buy a piece of gold or silver, the less that paper money is worth. The higher the price of gold or silver, the less value paper money holds in The Markets.

Did you know that people are removing their money from mutual funds and stock portfolios by billions of dollars? They’ve been removing that money, pulling it out of the financial equity markets for more than 30 weeks. Week after week, people are taking their money and going home. And yet, The DOW closed at over 12,000 points today. Is that good?

How can this average of Very Important Company Stocks be going up, when so much of the fundamental economy is going down or holding steady at very low levels? One way would be to remove from this average any company that isn’t doing very well. Another way would be for someone with an infinite supply of money to buy as much of those stocks as possible every day, regardless of whether or not they make a profit.

What about the Consumer Price Index (CPI)? This is an average of what a “basket of goods” costs on the open market. How can that CPI remain steady, indicating according to statistical analysis that prices aren’t getting higher? One way might be to remove things like oil, gasoline, energy and food. Another might be to change what’s in that “basket of goods” from steak to hamburger, and eventually to cat food.

And how about those manufacturing numbers? General Motors (GM) failed last year, and had to be purchased by the government. They say that The Taxpayers came up with that money, but in fact it was just more paper money created by the Federal Reserve. WE, the Taxpayers don’t HAVE any money!

GM supposedly is doing Just Great! They “sold” more cars than last year, and Happy Days are Here Again! We’ll just ignore the fundamentals. Indeed, GM “sold” half a million cars to their dealers, who put them into their inventory. By golly, Manufacturing Inventory numbers are up too! Therefore, says the BLS, the economy is improving!

Ultimately, it’s up to you, me, and each of us as individuals, whether or not we care to learn about the underlying fundamental facts of today’s markets and economy. Half the population seems to believe that “facts” are whatever someone says they are. The other half holds that facts are statements in a language, which match an observation in reality. That second half also holds that reality is real, regardless of whether or not human beings exist to perceive reality.

Half the population holds that reality is a figment of our imagination. Many of those people work in the Bureau of Labor Statistics. Many more of them work for the important news services around us. To them, since reality is whatever anyone wants to say it is (or feels that it is), then facts are simply interpretations of feelings. If it feels true, then it is true, according to modern deconstructionists.

So what do YOU think? Is reality just something to ponder when you’re having a beer after dinner? Or is reality the fundamental platform in and on which we all exist? Do you feel that the economy gets better or worse all on its own? Do you think the economy is only a result of underlying fundamental events?

Sadly enough, it soon won’t matter which way you think or feel. Reality always has a way of being real, and no amount of pretending can change that. I feel this is really, really true, y’know? I mean, like, I read it on the Internet, so, like, it sorta has to be true, right? Or…whut-EVERRR!


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