The Stock Market, Like Pavlov’s Dog

Today the stock market has rebounded somewhat after a few tough days, although that result could turn on a dime.

What caused the stock market to plummet the last few days?  Poor sales by large companies?  Weak economic data?  Lingering concerns about an unemployment rate that remains too high and millions of Americans giving up on job searches?

Nah.  It’s because earlier this week Ben Bernanke may have hinted that the Federal Reserve is going to tighten its prolonged loose money policy and may actually reduce the amounts of cash it has been pumping into the economy.  Of course, whether the Fed actually is going to change its policy isn’t entirely clear.

It’s sad, really.  We’ve gotten to the point where the Wall Street titans and stock market wizards have become so addicted to the manipulations wrought by the Fed’s monetary policy that the market simply responds, like Pavlov’s dog, to the Fed’s opaque pronouncements.  Ben Bernanke sounds a bell, and the market starts slobbering like Fido expecting a wet can of Alpo to splat into his food bowl.

This should be a concern for all of us, especially those of us who are trying to save for retirement.  The stock market, where so many people keep their money, has become a one-note opera.  The overriding focus is on what the Fed will do.  Actual economic performance, actual company performance, and other “fundamentals” that used to be reflected in stock prices now are overridden by the aggressive actions of the Fed.

It’s not a good thing when the stock market is so easily manipulated, and when companies become so dependent on easy money.  The fact that it is an arm of the federal government that is doing the manipulating doesn’t make it any better.

Giving Thanks For Our Political Leaders

This Thanksgiving week, I’d like to give special thanks for our political leaders.  At this time of national challenge, we are blessed with a political class whose spirit of self-sacrifice, personal courage, and intestinal fortitude compare favorably to those of our Pilgrim Fathers and the Signers of the Declaration of Independence.

I’m thankful for politicians who haven’t let the need to reassure nervous financial markets or the selfish concerns of Americans whose retirement savings accounts will be depleted by wild stock market plunges distract them from their crucial campaigning and fundraising.

I’m thankful for the President and Members of Congress who wisely decided to discard old-fashioned political processes and delegate all deficit reduction efforts to a “supercommittee.”

I’m thankful for the members of the “supercommittee” who rolled up their sleeves and had a few meetings and hearings before calling it quits.

I’m thankful for the far-sighted Democrats and Republicans who had the courage to accept a decrease in our national credit rating in order to stand up to the unreasonable expectations of the ratings agencies.

I’m thankful for the Members of Congress whose intuitive understanding of economics is so great that they have been able to increase their personal fortunes while serving the public good.

I’m thankful for a bold President who recognizes that the most crucial question to be answered when addressing any important issue is how to ensure that others will be held strictly accountable for the ultimate failure.

I’m thankful for those perceptive Democrats and Republicans who have finally come to realize that most Americans want to shrug off the weighty mantle of global leadership and be more like Greece.

Finally, I’m thankful for those enlightened political leaders who recognize that every single federal program, every single federal job, and every single federal tax exemption, deduction, and loophole is absolutely essential to the future of our Republic and cannot possibly be eliminated or changed in any way.

With leaders such as these, is there any doubt that our great nation can squarely meet and overcome whatever challenges might confront us?  The turkey is going to taste especially good this year.

Anticipating Supercommittee Failure

The news about the debt supercommittee — the Joint Select Committee on Deficit Reduction — is not good. According to the Washington Post, the supercommittee members have gone on the Sunday talk shows to effectively concede they won’t succeed and to begin to prepare for the impending failure.

We can expect that each side will blame the other.  Congress might not be able to make hard decisions, but they are peerless in shirking responsibility for failure.  Even more sad, yet predictable, Congress also is talking about deactivating the automatic spending cuts that were supposed to make a grand compromise more likely.  If they do that, of course, the entire supercommittee charade will be exposed as a silly sham that has done nothing except demonstrate that our leaders lack the discipline and the will to make tough choices — even when the grim example of countless debt-ridden Eurozone countries shows clearly what ultimately will happen if our constant deficit spending habits are not curbed.

We are seeing an amazing lack of leadership in Washington, D.C., from the President on down.  Hang on to your hats tomorrow; if the financial markets get the idea that the supercommittee will fail and that no cuts of any kind will be made, we may be in for a serious stock market meltdown.

Confidence Game

On Friday the index that purports to measure consumer confidence in the United States fell to its lowest point since May 1980.  May 1980, of course, came during the grim, final months of the Jimmy Carter presidency — and I’m sure the fact that consumer confidence has fallen to Carter presidency levels probably doesn’t make President Obama very happy.

Why is consumer confidence so low?  Well, wouldn’t it be fairer to ask why consumer confidence should be higher?  The American consumer is like a punch-drunk fighter that has been absorbing repeated haymakers for months now.  Whether it is the continued high unemployment rate, record numbers of home foreclosures, unending deficit spending, or paltry economic growth, there just isn’t any good news to grab onto.  Why should consumers have confidence when the trading patterns of the Masters of the Universe on Wall Street have all of the stock exchange indices jacking up and down like a bungee jumper and our political leaders can’t or won’t present any plans that plausibly seem capable of changing things for the better?

Consumer confidence needs to be inspired.  There just isn’t much inspiration out there right now, and more tired speeches from the President and congressional leaders aren’t going to provide any.  I’d be surprised if the consumer confidence index surges anytime soon.

Trying To Think Positive Thoughts About The Stock Market

It’s hard not to be depressed about the anvil drops on the stock market.  Many of us have lost about 10 percent of our intended retirement nest eggs in the space of only a few days.  However, my grandmother said every cloud has a silver lining, and I always have tried to follow my grandmother’s wise advice.  So, here is my attempt to come up with some positive thoughts about the recent performance of the stock market:

*  It’s knocked the stories about the Ohio State football program off the front page

*  I’ve been told that gray hairs make me look distinguished

*  I probably won’t like eating dinner at 4:30 p.m. until I’m in my 80s, anyway

*  Hey, maybe now people won’t think I’m “wealthy” and want to increase my taxes!

Bursting Bubbles

With the wild stock market swings in recent days I thought it might be helpful to recommend a book I just finished today, The Great Depression Ahead by Harry Dent.

It is an excellent book which is simple to understand that everyone who is an investor should read with an open mind of course. Mr Dent is a long term stock market bull who predicted the technology boom and it’s demise and turned bearish a few years ago. He is predicting Dow 3500 – 3800 between now and 2014.

The premise of the book is that simple trends drive long – term growth and that changes in demographic and technology cycles are critical in predicting business and economic trends. He mentions that government intervention (QE2, stimulus etc) can sometimes delay, but won’t be able to overcome the massive baby boom generation productivity, earning and spending power that have now peaked.

He uses data going back to the mid – 1800’s to come up with three different cycles – the 80 year lifetime cycle (last peaked in 1930), the 40 year generational cycle (when generational spending was at their peak in 1930 – 1970 and 2010) and the 30 year commodity cycle (that peaked in the years 1890 – 1920 – 1950 – 1980 and 2010) all converging bubbles that are popping at approximately the same time 2010 to cause an upcoming major stock market crash.

It’s his opinion that a diversified portfolio which we are all taught to have will not be able to withstand the coming stock market crash and that only cash and high yield bonds will fair well in the near future. Mr Dent believes there will be bear market rallies until 2020 -2023 at which time a new “boom period” will emerge.

My next read is going to be Aftershock by David Wiedemer, Robert Wiedemer and Cindy Spitzer, all economists who are predicting a more radical market meltdown then what Mr Dent is predicting.

Retirement Fund Haiku

The stock market — and the 401(k) plans of millions of Americans — really took a beating today.  Anytime the market plummets more than 500 points and loses almost five percent of its value in a single day, it is just not a good day.

Why did the market drop like a drunken sailor after his last mug of grog?  Who knows?  The zig zags of the market are beyond the ken of mortal investors.  Perhaps the Wall Street wizards have come to recognize what most of us have realized for a long time — the economy sucks wind like an overweight sprinter, and its not getting whipped into shape by the expensive “cures” emanating from Washington, D.C.

There’s not much we can do about it, except compose another bit of stock market haiku to commemorate our vanishing paper profits:

Economy blows

Retirement just a dream

And summer’s too hot

401(k) Follies

Many of us have tried to save and plan for retirement.  We’ve read the books about how investing in mutual funds is one of the best ways to maximize your return and grow your nest egg over the long term.  We’ve followed that advice, and many of us have stayed the course, through up years and down, trusting in the historical fact that the stock market will produce long-term gains that outstrip every other investment vehicle.

As I sit here tonight, amazed that President Obama and congressional leaders have taken us to the brink of apparent default, I wonder:  If the debt ceiling is not increased, if the United States defaults, and if ratings agencies downgrade the investment value of United States government securities — with the likely negative ripple effect of those developments throughout the economy — does anyone doubt that the stock market will plunge and our carefully considered long-term investments are going to take a huge, unnecessary hit?  And if that inevitable hit occurs, how long will it take for our retirement funds to recover from it — if ever?

I think the dumb brinksmanship we are seeing from every one of our political leaders right now is infuriating, but I cannot imagine how angered I would feel if I were on the eve of retirement and saw those leaders taking absurd risks with the value of my hard-earned, soon-to-be-needed retirement nest egg.  It’s one thing to believe that our elected representatives are unconcerned about the average schmoe, it’s quite another to see that they are gambling with your money and your future solely to further their partisan political positions.

U, V, Or W (Cont.)

The most recent economic news is pretty darn grim.  The number of people filing new claims for unemployment benefits has increased, the housing market in America is depressed, and the stock market has just experienced its worst quarter in some time, with the Dow down more than 10 percent.  When you combine that with the sharp drop in consumer confidence, you get a recipe for the dreaded “W”, or double-dip recession.

Let’s hope that the current bleak outlook doesn’t continue; we don’t need the 401(k) plans and net worths of Americans to take yet another hit.  The tenuousness of the American economy, however, just indicates how important it is that our political leaders focus on getting our economy out of the dumper and back to serving as an engine of job creation.  We shouldn’t be concerned with “cap and trade,” or “green jobs,” or new tax burdens to finance other policy initiatives right now.  Bill Clinton’s reminder has never been truer than it is now:  “It’s the economy, stupid.”

Redefining “Improving” (Cont.)

Today we got more economic news that indicates that the economy that we keep hearing is “improving” is, in reality, not doing much along those lines.  The May jobs report showed that the economy added 431,000 jobs last month, but that number is not considered very good news for two reasons.  First, economists were expecting the creation of significantly more jobs; estimates ranged as high as 750,000 new jobs, and the average estimate was well above 500,000 jobs.  Second, the vast majority of the jobs — more than 90 percent — were temporary government jobs related to the 2010 census.  In all, 411,000 of the new jobs were temporary census positions that will end later this summer, and when that happens all of those people will be back on the pavement.

The stock market plummeted on the bad employment news, as well as the unsettling debt news from Hungary.  Anyone who pays much attention to the stock market these days is likely to get whiplash; the market is bouncing like a yo-yo.  I think the reason is that the market is simply reacting to the daily news without much direction from underlying fundamentals.  No one knows whether the recession is really over, whether the European debt crisis will be successfully resolved, or whether wars will break out in the Middle East or on the Korean peninsula.  The uncertainty makes the market lurch up and down as investors try, unsuccessfully, to read the news each day as an indicator of long-term trends.

What is clear is that the economy is not “improving” — at least, not in a way that is very noticeable for the average citizens who care mostly about jobs.  We would all be better served if economists kept their thoughts about the “improving” economy to themselves until we get several months of strong employment news.

Redefining “Improving”

Redefining “Improving” (Cont.)

Redefining “Improving”

How many times have we seen this story since the recession began and President Obama took office?  We get more bad economic news, and economists express surprise at the crappy news in view of the “improving” economy.  Is anyone but economists surprised that we are getting more bad economic news?  Does anyone other than academics actually believe that the economy is significantly improving?

Consider the linked story, which reports on news released today.  The unvarnished truth is that 471,000 people filed new claims for unemployment benefits last week, up by 25,000 from the number of new claims filed the week before.  The index of leading economic indicators dropped.  The stock market plummeted, down more than 300 points.  The unemployment rate is 9.9 percent. The article reports that 4.63 million Americans are receiving regular unemployment benefits, and another 5.3 million Americans are receiving extended unemployment benefits paid by the federal government.  By my math, that is about 10 million unemployed people.  And Congress is now rushing to extend unemployment benefits — which already have been extended to 99 weeks — still further.

And yet the article refers to “an improving economy” that “has lured those who had given up looking for work back into the labor market.”  By what measure is our economy improving?  Are we just comparing the current situation to the point in the recession where the most jobs were being eliminated, and concluding that although thousands of new people are losing their jobs and looking for help, not as many are losing their jobs as were losing their jobs in March 2009?

This country has fallen far, indeed, if its citizens consider an economy with 10 million unemployed, a frozen credit market, an ongoing foreclosure crisis, and unprecedented governmental budget deficits — among many other problems — to be improving.  I’d bet most people don’t agree with such silly happy talk.

Market Jitters

Yesterday’s wild ride on Wall Street is one of those incidents that is profoundly unnerving to the average investor.  It is hard to believe that the Dow Jones Average sank more than 1000 points, from high to low, before rebounding somewhat.  Weeks of slow gains were wiped out in the blink of an eye, for unknown reasons.  And who knows what today will bring?

The news stories about the event have questioned whether there was some trading mistake, whether there was market manipulation, whether some robo-trading programs were inadvertently triggered, or whether someone actually hacked into the New York Stock Exchange.  Anything is possible, I suppose, but I think the more likely scenario is that investors are extremely skittish — and they have a lot to be skittish about.  The Greek debt crisis continues to be a huge problem, other debt-ridden EU countries may not be far behind, and their more solvent EU partners may be balking at more bailouts.  In America, after months of bland assurances that the economy is on the upswing, we aren’t seeing much real job growth or signs of significantly stronger economic activity.  In the meantime, America seems to be piling up its own debt at an astonishing pace, as if the country were bidding to outdo Greece.  With this kind of national and international context, is it any wonder that markets are jittery?

Uh Oh

Dubai World, the state-owned company that has been borrowing like crazy and building artificial islands, fantasy structures, and other projects to convert Dubai into a kind of vacation wonderland, has announced that it will not be making interest payments on its loan debt.  In other parts of the world, where the markets aren’t closed for the Thanksgiving holiday, the reaction apparently is panicky and some banking stocks are getting hit hard.

My guess is that traders everywhere are still jumpy after the near meltdown that happened last year, and any sign of possible significant default by a big borrower is going to make the markets especially nervous and curious about on whose balance sheets the eventual liabilities may land.

The Downturn Hits Home

They say that it is a recession when your neighbors and friends are out of a job, and a depression when you are unemployed. By that measure, it is not a depression, but there is no doubt that the economic downturn is affecting people we know. Many law firms, for example, have instituted significant layoffs of partners, associates, and staff.

In the meantime, the steady decline in the stock market is a dreary, depressing, and constant reminder of our economic woes. This article — http://online.wsj.com/article/SB123604419092515347.html — takes a perspective that some people will not agree with. In my experience, however, investors tend to focus on the future, rather than on the past. In my view, therefore, the steep drop in stock prices since President Obama took office undoubtedly does reflect, at least in part, a lack of investor confidence in his economic team and his plans.