Posted by
Andrews on Wednesday, February 25, 2009 1:10:16 PM
My wife sent me
an interesting article today. It comes from the very liberal
Baltimore Sun, called by some the Calvert and Center Street Democrat Club, and it does appear to have a partisan agenda.
The article is not political in appearance. No, it appears to be an unbiased analysis arguing that the Dow is a bad measure of economic activity. Basically saying, despite decades of consensus that the Dow provides a good, if not perfect, predictor of economic activity, that this author believes the Dow should be replaced.
So, why do I call that political?
For the same reason I say the abandonment of the SAT, or the addition of a subjective essay to that objective test, is political. The SAT was undermined because it told an unacceptable tale, at least unacceptable to certain segments of the population. Universities had found the SAT was a good, not perfect, predictor of college preparedness, and so had decided upon it as the centerpiece of admissions*. But the tests showed black students, and others that were "underrepresented", were not prepared for college. So the diversity-pushers tried to undermine the SATs to avoid this stumbling block. Unfortunately, that did not change reality, and the newly admitted unprepared students ended up taking 5 or more years, or dropping out in great numbers.
And the same is true of the Dow. It is not perfect, but does provide a good gauge of the economy. And as it provides a way to compare apples and apples (for the most part) for nearly a century, it is a valuable tool. Unfortunately, as it has declined 40% recently, and tumbled dangerously whenever Obama mentions his supposed stimulus, it is an embarrassment to those who sing Obama's praises. And so they want to undermine this measure to hide the extent of the failure.
But as with the SAT, removing the Dow will not stop the economic collapse. You can remove the measurement, but the underlying reality remains. So hiding the measuring stick serves only to allow liars to continue to deceive the public, which appears to be the only reason I can see for eliminating the Dow.
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* Oddly, despite all the charges of "cultural bias", the SAT was originally introduced to stop discrimination. Non-WASP (Jews, Catholics, immigrants and others) candidates were being excluded from elite universities by using vague admissions criteria such as "character" and "leadership". The SAT was introduced to minimize the opportunities colleges had to replace objective criteria with subjective bias. And, strangely enough, it resulted int he admission of more non-WASP students. So much for "inherent cultural bias".
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POSTSCRIPT
His arguments against the Dow are somewhat valid, but can be raised against any index. And, true the Dow does tend to pick somewhat trendy companies (not all trendy companies, as many are on NADAQ, the one time home of the Dot Com hype), but that is likely true of any index, and as investors invest in trendy stocks, that being the definition of trendy, the inclusion of trendy stocks gives a pretty good picture of current investor interest. As to it not being "industrial", neither is the NYSE as a whole. For the Dow to be representative, it would have to have shed its more industrial character. Finally, as to the responsiveness objection, that is true of any index. Unless you engage in fancy mathematics, and thus render the index less intelligible and more prone to mistakes, it will be true of any index.
POSTSCRIPT II
I will likely revisit this article, and this author, as his article on why we should ignore tax cut "hype" is worthy of a post all its own. As is his call for a gas tax in Maryland, and talk of "energy inflation". So this man may prove a gold mine.
POSTSCRIPT III
And I will get to
that article I promised yesterday, as soon as I find time to read the article and think about it a bit.