Instead, the Dow fell another 443 points yesterday. The index has fallen almost 1,000 points since the election results were announced.
Oil fell too, and seems to be ready to drop below $60. As for gold, it lost more than $8 yesterday. That’s the way it’s been going. Gold loses value… but stocks lose more. ‘Sell stocks on rallies, buy gold on dips’ has been good advice. But it doesn’t feel very good. In a bear market, he who loses least wins. But even he doesn’t feel like much of a winner – not when cash is outperforming him.
Why no ‘bama rally? Maybe investors are afraid that Obama is going to do what he said he would do – raise taxes?
We don’t doubt it. But an increase in the top marginal rate from 35% to 39% is not going to make that much difference. Neither is an increase in the tax on dividends.
No, we suspect investors are just looking ahead and realizing that the whole U.S. economy is going into rehab. And they figure they might need their cash for a little rehab of their own.
And so they pull back… out of risky investments… out of expensive hobbies… out of the shops and restaurants…
“Shoppers cut back,” says a Reuters headline. Hey, newshounds… tell us something we didn’t already know!
Retail sales are the worst in 10 years, the report continues.
Disney admits that its profits are falling – down 13% in the latest quarter. Morton’s Steakhouses say the customers aren’t coming in the door the way the used to.
And the Wall Street Journal tells us that “frugality” is making a comeback. Hey, we knew that too!
But that’s just what rehab is all about… sobering up… straightening out… drying out. It’s humiliating too. You have to stand up and admit that you were an idiot and a jerk… promise to do better… and ask for forgiveness. Well, at least that’s what we had to do that last time we were in rehab.
Then, they finally let you out and you can go get a drink.
But right now, the U.S. economy… and much of the world economy… is just going in, just beginning the process. So far we’ve just seen the shakes and the night sweats. But there’s more coming…
Because as each man pulls back, he takes something away from the other fellows around him. He pulls his money out of a stock; the price falls; and other shareholders are poorer. He walks to work rather than taking a taxi, and then the taxi driver has less revenue. He tells his son: ‘If you want a pizza, you have to get on your bicycle and go pick it up yourself… and get the cheapest one.’ And then, the pizza-delivery service has less money.
And so then the taxi company has to go into rehab too… and the pizza business… and the other shareholders. And pretty soon, everybody’s taking money away from each other as fast as they can. That’s what frugality is: not giving other people your money. But then, obviously, others are forced into frugality too.
It’s back to rehab for everybody.
*** The first priority, says a piece in the New York Times is to “stabilize the patient.”
Who could argue with that? Seeing no one raise his hand, we will.
All over the world, the ambulances are rushing to the scene of the accident. Yesterday, the British rescue team arrived and immediately pumped an unexpectedly large dose of adrenaline into the market. The Bank of England cut its key rate by 150 basis points – its boldest move in 27 years.
Meanwhile, over on the continent, the European Central Bank had its needle in the other arm, with a 50 basis point stimulus transfusion.
Not to be left out, the Swiss cut rates by 50 points too. Australia cut rates by 75 basis points a few days ago. And Korea announced a rate cut too. (We don’t know how much juice the Koreans have in their plastic pouch… we can’t read Korean).
Meanwhile, Nancy Pelosi, the Speaker of the House, is about to put her back into another heroic rescue attempt. The House is where spending bills are supposed to originate (notwithstanding the fact that the biggest spending bill in recent memory – the $700 billion Wall Street bonus protection plan – actually got its sordid beginning in the Senate). And Ms. Pelosi, formerly of Baltimore, Maryland, where she was known as the “mayor’s daughter,” now has a democratic majority in the House… and the Senate too. She can probably get just about any fool piece of legislation passed that she wants.
And what everyone wants now is to “stabilize” the financial markets so investors won’t have to go into rehab and drag the rest of the economy with them. The idea is to keep the booze flowing… and hope the party comes back to life.
Stability produces instability, Hyman Minsky used to point out. Why? Because when investors have no fear that someone will call the cops, they tend to party harder. With no threat of crash or correction, they take more risks in order to squeeze out more gain.
We read a first-hand account by a member of a local government investment committee, explaining how the committee had lost its money in sub-prime mortgages. Most of the people on the committee had little idea what was in the package of sub-prime debt, he explained. But one of the committee members had connections on Wall Street who convinced them that they might as well get the extra yield that these instruments promised. After all, they were rated Triple A by the agencies and the likelihood of a problem was so slight it didn’t deserve considering. So, they went for it and put millions of dollars of municipal pension money into these monstrous investments (Wall Street collected a fat commission on the transaction.)
They made a mistake, in other words. Of course, as Marcus Aurelius explained, Nature has no quarrel with mistakes. In fact, she welcomes the crack-ups they produce. Losses are just a way of bringing change. The mistakes are washed away by corrections, making way for new life… and new mistakes. That’s how capitalism works.
But now, the stabilizing quacks want to stop the process of nature. They hope to stop change; to give these miserable monsters so much juice that they will be kept alive – forever. Of course, they can’t really succeed. They can’t beat Nature… not in the long run.
But it’s not the long-run that anyone is worried about. In the long run, we’re all dead, said Keynes. What people are worried about is the next few months. They don’t want to go broke in the next few months… or have to stand up and admit that they’ve been idiots… or give up the beach house…
Let Nature take her course, is our advice. Get it over with.