Saturday, April 11, 2009

Is it the Economy, or the Stock Market?

I have noticed that lately there has been a lot of talk about how the "Economy" is in a downturn. What I think is interesting though is that the reference provided in support of this viewpoint is of the Stock Market.

I am not a particular expert when it comes to economics, but I know the difference between the Stock Market, and the Economy. The Stock Market relies heavily on the financial market, for the very fact that it is usually a credit based endeavor.

This recent Stock Market downturn has been mainly due to the freezing up of credit flow, primarily due to the sub-prime mortgage bubble bursting. These banks lost billions of dollars on bad loans, which they needed to reallocate quickly. This means they needed to call in outstanding loans, rally up fresh capital, or sell stocks and bonds to infuse themselves enough to rebound.

The obvious result was a little bit of the first, and the last. This created a huge stall in the Stock Market with the mass sale of shares at lower prices. With this massive move out, enough shareholders were spooked to follow suit, creating a domino effect, bringing the whole market down.

What is my point you ask? I personally have not seen any actual atypical changes in the Economy. Businesses that were credit dependent folded due to lack of credit availability. These were weaker businesses anyway. I haven't seen a single business fail of late, that wasn't already trending to failure.

An example would be GM. GM has been selected against for many years now due to their inability to adapt to changing economic demands. Simply put, consumers want cheap, small, fuel-efficient vehicles, which is everything GM isn't. The failure to adapt has always been the theme of a "survive or die" world.

I would say that to equate the Stock Market with the Economy is a gross misrepresentation of our economy. A vast majority of jobs and commerce is provided by small businesses. Businesses that aren't public, so they can't be found on Wall Street. These businesses are not seen in Stock Reports, which means those same reports will never be a true representation of our Economy.

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