The Disconnect Between the Stock Market and the Economy

Andrew Smithers explains the disconnect between the stock market and the economy in his FT.com blog (free registration required): The declared aim of modern pay structures is to align the interests of management and shareholders. The result has been the opposite. Modern incentives have increased the difference between the short-term interests of management and the long-term interests of shareholders. This is because the value of bonuses and options depends on the volatility of the profits to which they are related rather than their growth. Modern incentive structures are thus contrary to the interests of long-term shareholders, if not necessarily of those investors who share the short-term time horizon of managers ... In neither the UK nor the US is productivity likely to recover unless its cause is understood, and the lack of public debate is holding back understanding. The management incentives that we have today, at least in Anglophone economies, are perverse. They are contrary to both the long-term interests of shareholders and to the current health and long-term growth potential of the economy. This will continue until the incentives are changed and they will not be changed until the issue is understood. The first step to doing this is to get the problem widely discussed. This is the reason why stocks continue to advance while the economy has fallen back into recession. And, you know it's not going to end well. We've had two 50% or more “corrections” since 2000. The next one is going to be much bigger.

Posted in: Wall Street Trading