No, of course not. But this is in effect what we do today when we couple real markets to that big gambling joint called the stock exchange and financial markets. People make bets and counter bets all the time, in micro second intervals as well as for slightly longer periods. Research shows that the short to even medium term fluctuations in the financial markets - the stuff newspapers and the media love to tell us about and try to interpret every blip and dip - is not connected to the real world. It is responding to itself only. So why do we use it to judge the worth of executives, firms and especially banks and investment houses?
It is as if we link the evaluation of executives and firms and and banks to the Monte Carlo Casino - or any casino. In casinos bets (investments) are made and accepted by the house or others (as in poker games for example). Some win some lose and fortunes fluctuate over time. A Black Swan event here would be the guy that broke the bank of Monte Carlo. An extreme and rare run of "shrewd investment". But there are better rules in casinos. You cannot run a ponzi scheme like Bernie Madoff.
As a result of the GFC, nations started to reexamine their economic models and financial systems. I have blogged about that before - see "What is wrong with our economic models?" In the UK they have forced a decoupling of the retail and investment sides of banks. This is a good move because it shields the retail customers from the gambling, sorry investment, behaviour of the bank.
The financial markets are a means of liquidity in the world that facilitates trade and real investment. But things have gone way way way beyond that in the last 30 years or so. Share prices are not linked to profit performance in the short term but to speculations, bets and counter bets on what others are going to do in response to profit and other announcements and any event you can think of that people may think about. Exchange rates are not longer determined by the trade flows and need for foreign exchange to buy and sell goods and services between nations and currencies. Now they are determined by hot money washing around the world based on bets everyone is making. And dont get me started on derivatives, that no one understands and have been described by one of their inventors as like toxic drug.
In the longer term there is some sanity in the markets and this is reflected in the rise of share prices of impressively performing real firms that do provide value - the miners in Australia, Google, Microsoft, Boeing etc etc. Pension funds look bad in the short term, if they get their bets wrong, which can be real scary for pensioners, but over a longer period they may be more stable - but not always and then the poor pensioner loses out. Many firms, not just so called financial investment houses, these days make much of their profits and losses by gambling, oops investing, in financial markets rather than from the products and services they provide. Enron was a classic case of manipulating the markets and prices. They made more money from disrupting electricity supplies it seems.
The current wall street sit in and protests around the world are testimony to the public waking up and shouting "we have had enough and we are not going to take it any more" - just like Peter Finch did in that great movie.
May you live in interesting times. This is a Chinese curse.
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