Should Investors And Traders Care About Economics?

by: Vikram Rangala

I was talking this week to one of Chicagoland’s leading custom home builders about the changes in his company’s business model since the credit crisis. That crisis had wiped out many competitors, who were mainly investors, sort of like house flippers (remember that?).

When they folded, they left their craftsmen out of work. Lakewest kept and expanded its workforce, who are, as you might imagine, skilled, motivated, and loyal. In short, his business model centers around keeping his workers doing work at the peak of their ability.

What the stock market or even interest rates do barely touches his business. Anything short of another crash means little to him. His economics are the demand for homes in Naperville and the well-being of his employees and family.

It got me thinking about one of my big questions: What is an economy for? As I’ve pointed out before, Milton Friedman never claimed that the economy’s purpose is to enrich corporate shareholders.

The New Capitalist view is that the purpose of an economy is to help people create opportunities for dignified, meaningful work and through that work, a chance to pursue happiness.

But the nearly 160% rise in the stock market since March 2009 has enriched shareholders. A $10,000 investment in the SPDR S&P 500 Index ETF SPY in January 2009 is now worth $20,400.

The problem is, the effect of that hasn’t trickled down to the rest of the economy, which is doing better by many measurements, but not fully recovered from the self-inflicted wound we call the Great Recession.

To borrow from President Reagan’s famous question, “Are you 104% better off today than you were in 2009?” Some of you, yes. Most of you, no, at least not in money terms.

As this viral video makes clear, we simply don’t realize how unequal we are.

Studies show 92% of Americans agree that wealth is too concentrated in the hands of the wealthy. But even those people don’t realize how bad it is. It is 1929 bad. It is almost “Let them eat cake” bad.

Those 104-plus-percent gains that we talk about? 95% of that money went to the 1%. Most of it went to a fraction of that 1% that you could fit on a cruise ship.

Sure, they invested the most so they should get the most. No one argues that. But should that be the main way we measure how well we are doing? Is that what we built this machine called an economy to do?

After all, retail investors, the so-called Mom and Pop with their E-trade accounts, haven’t returned to the U.S. equity market in a big way and those who are investing are preferring small-caps and international stocks much more than they used to. So are the mutual funds that cater to retail.

In other words, the stock market is really two markets, one for big institutions and a different one, with different priorities, for retail.

OK, enough economics, already. Talk about the money!

Trading is best done amorally. There are limits, but when Warren Buffett does a major buy in Exxon-Mobil (NYSE:XOM), he isn’t donating to the Destroy our Oceans and Suppress Middle East Democracy Fund. He’s just saying, as long as we’re still running on dinosaur remains, might as well take some of those profits and move it to better hands.

In the same way, my trading corn doesn’t mean I love Monsanto (NYSE:MON) and GMO monoculture infestations. My trading cocoa doesn’t mean I support child labor. If I boycotted every product that had cruelty in its supply chain, I’d be naked, hungry, and homeless.

My trading can’t directly change macroeconomic reality, so why should I look to the news to tell me how to trade?

Take yesterday’s drop in the stock market. Was it caused by a collective New Year’s hangover? Was it because of the Fed? Or in spite of the Fed?

We all know the reason: Miley Cyrus. OK, I can’t back that up. But it’s about as good a “reason” as any other you’ll see on TV. The market dropped because it dropped. That’s all we know for sure that actually is so.

What we can do is identify the trend for a given time frame and follow it while maintaining control over the only thing we can control: our thoughts.

And a trader’s thought should be this. If the markets are divorced from the reality we live in — and they are — then let’s accept it. Successful traders don’t worry or much care what the Fed does or doesn’t do or what the overall sentiment or buzz says. Many of them don’t even prefer one economic theory.

They follow price. They use logic on the field, compassion off the field, and humor always.

We don’t need to know a lot of the things we think we need to know. Because we often find out, after knowing them for sure for years, that they just ain’t so.

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