OG responds to my open email to NPR’s Morning Edition on their misuse of the Dow Jones Industrial Average:
You suggest that the DJIA is not relevant to understanding the “reaction” to Obama’s address on auto industry restructuring. The DJIA is certainly not an “expert.” However, as you note, it is “an indirect representation of millions of trades and a considerable number of motives if not insights.”
The DJIA’s “reaction” or “analysis” of the Obama’s plans (if we can attribute “reaction” or, even less tenable, “analysis” to the swarm mind of the Dow) will certainly not necessarily be “correct” (whatever that may mean here) or enlightening. But it is certainly a relevant factor in trying to gauge reaction to Obama’s plans. No one knows exactly why the Dow does what it does, but we can draw some conclusions from its inflections after certain news (see, e.g., the Dow’s reaction to Geithner’s several iterations of his bank plans). What we are drawing conclusions about is the general trend of the Dow swarm, and how the complex/simple swarm mind feels about certain news. In some ways, the swarm mind is stupid (see, e.g., wild swings on each word of Bernanke). In some ways, it can be incredibly “intelligent” (pricing in anticipated bad news, immediately absorbing and responding to new data, etc.)
The Dow (or stock markets generally) should certainly not be the only factor in an analysis or a “self-explanatory observation.” But the Dow, if only because of its size, must be considered — as part of a broader analysis.
As you note, the value of GM bonds are also relevant; but it would be a mistake to see the value of GM’s bonds — also arrived at through thousands of transactions of purchase and sale — as a wholly different species from the value of the Dow. I think it’s impossible to try to find anything “concrete” underpinning either the value of the Dow, GM’s bonds, or the price of gold. These things are simply manipulated stand-ins for other needs, wants, beliefs, etc. There likely is no “correct” value for the Dow, GM’s bonds, or Google stock.
I, too, am fascinated with the wisdom of crowds but it’s hard to quote a crowd. (The bigger the crowd, the harder it is to quote it.) Journalists owe their audience proper attribution and context. We don’t yet know enough about “swarm minds” to give them an unqualified citation – the gist of my complaint to NPR.
I cited GM’s bonds as a counterpoint because they’re a far more direct and discrete response to the fate of GM than the DJIA. Yes, bonds are also priced by market forces but by a much smaller set of traders using a much smaller set of data. (You could use the DJIA to monitor the global reaction to an outbreak of avian flu. But if you monitored, instead, the stock of pharmaceuticals or airlines you’d probably be closer to the truth.)
News outlets would do better to conduct polls of Wall Street traders than to cite the DJIA. But, polls are expensive to conduct. The DIJA is freely distributed.