Speaker 1: I’ve always wondered myself, why do we have to hear this every night when the stock market is doing
Speaker 2: 70 record closing highs so far for the Dow blasting through a sale in a record setting IPO? Investors who have been riding the wave
Speaker 3: when the stock market is booming, we’re made to believe the economy is booming. And in America, the stock market has been mostly booming for almost 40 years.
Speaker 2: But the stock market goes, so goes the wealth and the health of the American economy. What the market is telling us is that we are on the road to the skyrocketing stock market and that benefits everyone in the stock market has gained almost three trillion dollars in value since the election.
Speaker 3: But if you add up all the goods and services bought and sold in the United States, the actual economy, that number isn’t growing as quickly as it used to. Wages have hardly budged in decades, and the average American families net worth still hasn’t recovered from the Great Recession. So what exactly is the stock market measuring?
Speaker 2: The barometer of America’s prosperity
Unidentified: has been during the Dow. The Nasdaq, finally. And investors are salivating. Is this a new kind of. We’re all watching this global economic expansion. We are now at an historic stock buyback. It’s a fundamentally. Philosophy.
Speaker 3: To understand what the stock markets are measuring, it helps to imagine a very simple business, like a lemonade stand. Jill is killing it, but I’m thinking bigger.
Speaker 4: I try to get a loan, but the banks thought it was too risky. Average investors were by
Speaker 3: Jill has another option. She can go public, giving anyone who wants to the chance to invest in her business through something called an initial public offering or IPO. Investors pay a certain amount, say a dollar, to own a small part where share of Jill’s business, Jill sells a bunch of shares and I grow my lemonade empire right. Jill can put that money towards opening new lemonade stands, which means more profits. Jill can put some of those profits towards developing new products. She can also give some of that money back to her investors. These are called dividends. She doesn’t have to do this, but it does help get people excited about her company and more likely to buy her stock. Like Sam, he was sick on IPO day, but he thinks Jill is the
Speaker 2: smartest girl in the whole world. And I know this lemonade stand thing is going to be huge.
Speaker 3: So he offers to buy some shares from one of the original investors for twice what she paid for them. He’s thinking,
Speaker 4: Jill keeps this up. I can sell these shares for a bit more later on.
Speaker 3: That’s the stock market. It’s people buying and selling tiny pieces of companies based on how much they think those pieces will be worth
Speaker 2: in the future,
Speaker 3: except in real life. It’s happening thousands of times a second all over the world. There are stock markets everywhere, but the New York Stock Exchange is the big kahuna. It’s been around since 1792 when 24 stock brokers put on their finest short pants and top hats and got together under a buttonwood tree on Wall Street in New York City today. It’s where shares in big traditional companies like IBM and GE are traded. The Nasdaq is the cooler younger brother. It was born in 1971 and doesn’t have a physical location. All the trading happens electronically. That’s where you find tech companies like Apple and Facebook. So in America, if you want to know how the stock market is doing, you want to know how both these exchanges are doing. That’s where indexes come in. They take a whole bunch of share prices and transform them into one clean. No, the S&P 500 tracks 500 of the largest companies on both exchanges. While the Dow is a lot more exclusive, it only follows the 30 companies it considers the most important. In 2015, it booted out AT&T and replaced it with Apple. The Dow and the S&P are big American indexes, but other countries have their own indexes to measure their stock markets.
Speaker 2: The German Stock Index, DAX, London’s FTSE 100 index,
Speaker 4: the Nikkei index closed. The Shanghai index
Speaker 3: dropped. Today, many of the world’s biggest companies are publicly traded. But that wasn’t always the case. One guy, and it was almost always a guy, used to call all the
Speaker 4: shots big corporations of the nineteen hundreds. Most of them at that time had a single shareholder like Andrew Carnegie. Vanderbilt. Rockefeller. They really exercised very tight control over these businesses. This all began to change in the beginning of the 20th century. We start to see the rise of companies like General Motors and General Electric and RCA
Speaker 3: companies discovered what Jill discovered, that if you allow the public to buy shares, you can grow a lot faster. Shareholders want to make money. So if the CEO makes a really bad decision, they’ll start selling their shares, which will drive the price down. The opposite is also true. The possibility of a future payout encourages people to invest in risky new ideas. That’s the whole idea of the stock market as a force for good. It drives companies to make good decisions so they have more money to give back to shareholders and more money to grow and create jobs. And that’s good for everybody.
Speaker 4: By the middle of the 20th century, the American Public Corporation was proving itself one of the most effective and powerful and beneficial organizations in the world.
Speaker 2: There’s a sense of growing prosperity, and the telephone company is a great full participant.
Speaker 3: In the decades after World War Two, the stock market helped create the heyday of shared American prosperity. A new era
Speaker 2: began to make the system more democratic, increase the flow of capital for the financing of business.
Speaker 4: The corporation really was supposed to be a vehicle for providing investment opportunities not just to the very, very wealthy, but to average Americans. It’s generating superior returns for investors. Don’t you think we ought to invest millions of secure, well-paid jobs is producing innovative products that are bought around the globe. Executives and directors viewed themselves as stewards or trustees of great public institutions that were supposed to serve not just shareholders, but also bondholders, suppliers, employees, the community.
Speaker 2: Buick has provided a stomping ground from a cowboy in diapers and Buicks. General manager Ivan Willes drops in the Dupont company. Modern chemistry and modern industry join hands in serving our modern America.
Speaker 3: These public corporations helped build the American middle class. And for people who knew how to play it right, trading their stocks could build a fortune like this guy.
Speaker 2: I would work.
Speaker 3: Folk music is just his hobby. Mostly he’s the billionaire investor Warren Buffett,
Speaker 4: Warren Buffett, the biggest Wall Street titan
Speaker 2: of them all, because most famous investor Warren Buffett is worth eighty four billion.
Speaker 3: Buffett is famous for a particular investment style
Speaker 1: value investing, careful analysis of companies looking at their balance sheet, looking at their business.
Speaker 3: But if you don’t have time to do that, here’s a tip from the man himself.
Speaker 2: Why that should be. Five hundred low cost index fund.
Speaker 3: An index fund puts a little bit of your money in all companies in the index. Basically, you’re hitching your wagon to the stock market. The other option is to give your money to professional investors who for a fee try to beat the stock market. Buffett once bet a hedge fund a million dollars that over 10 years an index fund would make more money and he won. Picking stocks is a hard game, but there’s one popular strategy. This guy, John Maynard Keynes, you can’t remember him by his epic mustache. He came up with it. Keynes was one of the most influential economists of the 20th century and he noticed that newspapers would do this thing.
Speaker 1: They would have a full page of the newspaper dedicated to photos of pretty faces. And you are supposed to pick the six prettiest faces and mark them down in rank order and mail them in to the newspaper.
Speaker 3: The newspaper would rank all the faces based on how many votes they got, and the winner was the person whose choices matched the crowds.
Speaker 1: Let’s think about that contest. Do I really just pick what seemed to me the prettiest faces? No, I should pick what other people think are the prettiest faces. That’s kind of what happens in the stock market.
Speaker 3: It’s not the real value of companies that drive their stock prices. It’s the most popular story people believe about those companies. Sometimes the stories are backed up by facts.
Speaker 2: Chipotle stock has plunged more than a third. This comes after several outbreaks, including E. coli. Salmonella and norovirus were linked to the chain and emissions scandal rocking. Volkswagen is sending its stock into a freefall.
Speaker 3: But sometimes the stories are all hype.
Speaker 2: Internet companies are the hottest and most profitable investments in a generation. They’ve driven the value into the stratosphere. Lycos Excite Yahoo! Those Internet stocks continue their meteoric rise.
Speaker 1: The narrative in the 1990s was Internet companies are going to dominate. These companies shouldn’t be trying to make profits. That’s a good story, which is partly. Right, we do have companies like Amazon, Google. The problem is that nobody had any way to calibrate this story. How high should the market be?
Speaker 2: Is it a boom without end? Has the economy changed for good?
Speaker 1: You know, something’s wrong when everyone’s talking about something like this. It’s a bubble. It’s like a snowballing effect. It keeps getting higher and higher. It can’t go on forever.
Speaker 2: The dotcom honeymoon is coming to a close in many parts of the world. Dotcoms have become dot bomb. 300000 tech jobs are now gone, described as nothing short of breathtaking. The points dropped never before seen on the US market. It left traders and investors shell shocked
Speaker 3: when stock market bubbles burst. It doesn’t just hurt investors. It wreaks havoc on the whole economy. Millions of people can lose their jobs. Companies go under and pensions get pummeled. But even when the stock market is up and investors are making money, that can hurt the economy, too.
Speaker 2: We are heading toward the most acute shortages of energy since World War Two motorists who began lining up before dawn in hopes of getting enough gasoline to take them through the day. You’re mad about the way prices have risen and
Speaker 4: thoroughly discouraged and disgusted with the whole thing. There was a general sense of concern that something had gone wrong in the American economy, and eventually the finger got pointed at the way our large public corporations were operating and being run.
Speaker 3: Meet the chief finger pointer. Milton Friedman, an economist so famous, he was invited onto popular talk shows to help explain his philosophy.
Speaker 2: Did you ever have a moment of doubt about capitalism and whether greed is a good idea to run on? Tell me, is there some society, you know that doesn’t run on greed?
Speaker 3: Remember the wheel? Friedman was not a fan. He thought it should have. Exactly. One spoke shareholders. In 1970, he published a blockbuster op ed,
Speaker 4: the famous editorial that ran in The New York Times, in which he said that because corporations were owned by their shareholders, the only obligation of business was to make profits.
Speaker 3: Gordon Gekko’s character in the movie Wall Street epitomizes Friedman’s philosophy. You own the company?
Speaker 2: That’s right. You the stockholder, and you are all being royally screwed over by these bureaucrats. Greed, for lack of a better word, is good.
Speaker 3: And corporations took his advice
Speaker 4: and they start tying the top executives pay to share price performance. Well, if 80 percent of the CEO’s pay is based on what the share price is going to do next year, he or she is going to do their best to make sure that share price goes up, even if the consequences might be harmful to employees, to customers, to society, to the environment or even to the corporation itself in the long term.
Speaker 3: CEOs put more money towards things that would increase the stock prices in the short term, like cutting costs or buying back a bunch of their own shares to decrease the supply and artificially bump up the price between 2007 and 2016. That’s how companies in the S&P 500 spent more than half their earnings. Another 39 percent went to their shareholders as dividends, which didn’t leave much left to raise wages or expand or develop new products, things that are good for the economy and the long term.
Speaker 5: If you have a long term view that, you know, 100 hundred years from now, I still want to be a company, may be making something different, but I still want to be here. So the choices that you make in terms of investments in people and in capital are different than if you want to, you know, make an investment and generate a return within 24 months.
Speaker 3: In 2012, the Wausau Paper Company was making investments to switch its factories for making printing and writing paper to making tissue paper. But then a hedge fund bought up a bunch of shares and pushed the company to cut costs instead.
Speaker 5: Their argument would be, we don’t need to do that. But I’d rather see you do is to increase the dividend as management. We disagreed with that.
Speaker 2: We offered concessions. You know, we take a cut in pay just to leave the doors open. Quasthoff paper says it plans to close
Speaker 4: the local mill by March
Speaker 2: 31, leaving about 450 people without work. The news is devastating, not just to the workers who will lose their jobs, but to the community of Broka, where the paper company got its start December 7th. They’ll never forget that, you know, it’s when Pearl Harbor was, but that’s the day I was burying my father. And it’s the day I lost my job in the next day, I came to work and it was just a madhouse, you know, people just crying and you know why, you know, and it was a shock.
Speaker 5: My concern is we’ve evolved to this much shorter term view on shareholder rights versus a longer term view on stakeholder responsibilities.
Speaker 4: This is a trend that’s been going on for a while and has gotten even more powerful and important. That’s seriously threatening the ability of our corporations to pursue the kinds of projects that lead to long term corporate sustainability and economic growth,
Speaker 3: laying off workers, closing factories, keeping wages low. These are things that are bad for the economy overall, but can be great for a company’s short term profits. And that’s what the stock market cares about.
Speaker 2: The stock market got off to an impressive start. The stock market set another record today for the record books on Wall Street. U.S. economy charges ahead and so do the Bulls. On Wall Street was a big day on Wall Street. Five hundred has reached out to a new all time high.
Speaker 3: And as the stock market has grown, so have CEO paychecks. In 1973, the average CEO made about 22 times more than the average worker. By 2016, it was 271 times more. And as the stock market has grown bigger, fewer Americans have benefited. The share of Americans invested in the stock market is at its lowest point in 20 years as the middle class dropped out. So it’s no surprise that as stock prices have gone up in the United States, so has inequality. But it doesn’t have to be this way. Stock markets give people a chance to decide which companies deserve to succeed, which ideas are worth a gamble.
Speaker 1: There’s something about giving people games to play. You look at successful countries and they all have stock markets and countries that tried to shut them down are coming around and instituting them.
Speaker 3: Now, stockholders can influence how companies behave, whose interests they take into account.
Speaker 4: Most of us are thinking about our long term futures. We care about our neighbors and our children and our grandchildren. We have values and morals and want our companies to make money by doing things that are good for the world and not by harming people and destroying it. That’s what most shareholders really want.