Stocks Continue Tailspin Amid Uncertainty Over Economy

The New York Times ^ | September 3, 2002 | JONATHAN FUERBRINGER

[grania]

There's a lot of concern from people about their job security with summer vacations over.

Add one to the total..today I went to my part-time job (Math remediator, for-profit learning center) and we were locked out. I guess the owner of the franchise didn't pay the rent. No word, nothing. At least, I collect a pension. Some people really need that check.

[RightWhale]

It's just RightWhale's Economic Theory. The Prime Rate can be used to control the economy, but it works only within a narrow range. Below 2%, the economy will be stagnant. Above 5%, possible inflation. The range 2% to 5% is where the Fed can play and maybe get some results they like.

[A CA Guy]

Sorry to hear that. It's tough all over.

[grania]

Below 2%, the economy will be stagnant. Above 5%, possible inflation. The range 2% to 5% is where the Fed can play and maybe get some results they like.

Interest rates were much higher that 5% at the end of Clinton's administration, and there still wasn't much inflation. The stock market was inflated; I wonder if there is a connection.

It makes sense that there must be interest rates that are beneficial and others that aren't.

[grania]

Here's the happy news from Schwab's summary:

THE MARKET TODAY

Information provided by Schwab Center for Investment Research

Stock prices tumbled today following a weaker-than-expected Institute of Supply Management manufacturing index and a report of rising layoff announcements. In corporate news, Intel (INTC,15.86,f1&f4) had its outlook cut, while Citigroup (C,29,f2) suffered an analyst downgrade and more scrutiny of its Salomon Smith Barney unit. Treasury prices rose as stocks sold off, with the 10-year yield breaking below 4%. The Dow Jones Industrial Average plunged 4.1%, the S&P 500 Index purged 4.2% and the Nasdaq Composite Index was down 3.9%. Financial, computer and biotech shares led the broad decline. Volume on the Big Board was 1.3 billion shares, as 1.4 billion shares changed hands on the Nasdaq.

[RightWhale]

Just the Prime Rate. Other interest rates will be higher.

[Lessismore]

Memo to Bush -- It's the Economy, stupid.

[IncPen]

If this continues it will doom Bush. The economy trumps everything. Alan Greenspan was personally responsible for keeping Clinton in office. Now he has turned the interest rate knob to nearly 'zero' and has no more "control authority". Something better change fast or Bush is gonna be a one-term pres.

I agree with you, but I believe there is a distinction worth making. It's not 'the economy'. It's 'the uncertainty' that's driving the market down.

If Bush does not deal decisivly with terrorism, and the fear in this country, he is doomed. He set a high standard in the days following 9-11 and now it's time to pay the piper.

It's not a popular thing to say in some areas of this forum, but dealing with terrorism necessarily means taking out Saddam. Until we do, there will be uncertainty and fear.

The people who oppose this know it as well as I do, but they are afraid to say it out loud.

I'm not.

[SteamshipTime]

The Prime Rate can be used to control the economy, but it works only within a narrow range.

Yea, such a dread device must never be entrusted to the chaos of the free market! Utilizing Professor Boniface J. Tutwilliger's Hypotenusal Monetary Calculus, augmented with the augury of chicken entrails and numerology derived from the dimensions of the Temple of Solomon, we shall divine the Optimal Prime Rate!

Oh Magical Magnificent Federal Reserve Directorate, reveal Thy wonders to us!

[SteamshipTime]

Beg pardon, but I'd be confident the market players have already hedged their bets accordingly as to whether Bush does or does not destroy and subsequently nation-build Iraq.

IMHO, the market indices are down because you must produce before you can consume, and the U.S. has done more consuming than producing for some time now. Until we sell more than we buy, the market indices will stay down.

On a micro level, it follows that successful investors will be those who purchase shares in companies that do more producing than consuming. Easier said than done.

[IncPen]

Thanks for your thoughtful reply.

Beg pardon, but I'd be confident the market players have already hedged their bets accordingly as to whether Bush does or does not destroy and subsequently nation-build Iraq.

I agree with this, but the people who 'drive the market' are actually a small number overall, and have no doubt doubly insured their investments. The people who drive the economy are the ones I'm referring to. I have a choice: my dishwasher is broken, my wife wants a new one, but I'm not even sure we're going to have a house if there's a dirty bomb in town. Do I gamble that I'll still have a job and buy the new one, or call the repair guy, or wash by hand? To me, that's the real question at hand.

IMHO, the market indices are down because you must produce before you can consume, and the U.S. has done more consuming than producing for some time now. Until we sell more than we buy, the market indices will stay down.

Hmm, I disagree on this. We produced far more than we could consume in the 90s (have you seen a warehouse full of used $900 Aeron chairs? office cubes? laptops? A lot full of unsold SUVs?). I believe we're overproduced, not overconsumed, and that the markets are seeking equilbrium. There's a whiff of deflation in the air. The classic definition of inflation is 'too much money chasing too few goods'. That's not the current situation, in my humble estimation.

On a micro level, it follows that successful investors will be those who purchase shares in companies that do more producing than consuming. Easier said than done.

Maybe so. I rather think that successful companies are those that show more real profit, and thus a return for their investors.

[SteamshipTime]

Let me clarify my opinion.

Economic growth must be financed either thru production (or, more precisely, sales of produced goods and services for a profit) or prior savings, neither of which the U.S. has much of right now. As my dad says, you have to add value. There's too much "make-work," skimming, and net tax consumption out there.

In addition, the U.S. population is aging, becoming less productive and spending less. U.S. debt is expanding while foreigners are beginning to wonder how much an obligation to repay dollars with more dollars is really worth.

Until the above fundamentals change, I really don't see the sense in paying around $30 for every $1 of gross, pro forma, or whatever-the-hell-they-are earnings. This doesn't mean I think all stocks are worthless, but I think indexing and dollar cost averaging are going to see some serious criticisms after their returns are adjusted using a measure of inflation which looks at the expansion of the money stock.

[IncPen]

I think if I understand the essence of your post, you're saying that we have to get the money moving again.

That I heartily agree with. When money stands still, no one benefits. My view is that it's standing still beacause people are afraid to move it.

My father said that the end of it all would be 'repudiation of the debt', that is, that the debt and obligations of the US Treasury would be so extreme and the probability of it ever being retired so remote that the faith would be lost. This is a damnable legacy of the Clinton years: The 'surplus' which never was, ssqueezed from the lemons of Enron-accounting tricks

Having said that, I'm not pessimistic. This country is facing -all at once- all of the things we should have been dealing with for the last 9 years, ON TOP of the threat of terrorism.

For investors, as you've pointed out, this may be a time of unrivaled opportunity. No one makes real money on a sure-thing and risk is not inverse to reward. The bargains are out there, just harder to see.

Thanks for the insightful posts.

[RightWhale]

you must produce before you can consume

We can produce far more than we can consume. Production is hardly a problem. We can consume far more than we need. And we do. All these labor-saving devices from the 50s work, and we have so much free time we are looking for entertainments to fill the empty spaces in our schedules. Take a look around. Most who work "hard" are using labor-saving devices, power assist. Very few even pound nails anymore. Nail guns. Pow! Pow! Pow!

[AndyJackson]

It's 'the uncertainty' that's driving the market down.

Uncertainty may have started this down, but what is driving the market down is that it was and remains increditbly overpriced and it is going down. Both Peter Lynch and George Soros have explained how rising stock markets create financial opportunities for companies to cook the books and make it look as though they are earning money that they aren't. When it comes unraveled it goes the other way. Everytime you turn around, some asset that you could turn into cash to pay a bill no longer brings in the revenue it used to and so you have to liquidate more and prices go down. Soros wrote books about it, and given he made his billions off of figuring out how to apply this in a big way with lots of leverage he cannot be totally wrong.

[IncPen]

You're right.

Remember Greenspan gave his famous 'irrational exhuberance' speech as the market was going past 6,900.

I daresay it may have a long way to go yet, but as I've said elsewhere, confusion = opportunity.

[SteamshipTime]

At the macro level, Americans are not producing (i.e., profitably selling the fruits of their labor) enough to justify their level of consumption. They are using credit money created out of thin air to pay each other. Greenspan, after keeping the printing presses on 24/7 for ten years, now refuses to admit his prior mistakes and is keeping the bubble inflated. Thus, activities which would otherwise be untenable, like the Japanese zombie companies, remain instead of being liquidated. Additionally, the artificial incentives to consume lead producers to believe in a demand which is not really there.

Until all these prior mistakes are liquidated, the economy will not grow, notwithstanding the government's flawed econometrics. Furthermore, my prognostication is that as the baby boomers age and cut back their work hours and their spending, it is only natural that the economy will shrink to some extent.

Obviously, none of this keeps wise investors from finding wheat among the chaff. There's just a lot of chaff out there, IMHO.

[anymouse]

Memo to Lessismore -- It's the War, stupid.

Investors abhor instability. Whether it is induced by government meddling or inaction, or induced by natural or man-made threats, the market bottom falls out when investors feel uncomfortable about the risk of owning securities.

It gets much worse if there is a perceived insecurity in owning government secured bonds.

Congress' indecission over supporting the "War on Terrorism", particularly in doing so in Iraq is what is causing this perceived risk for investors.

Much of this will straighten out when President Bush calls Congress' bluff, and challenges them to a roll call vote to support going to war with Iraq - in his speech on Sept. 12th, 2002*.

* He won't do it on Sept. 11th out of respect for the terrorist's victims and families.

That said, the covert war has already started, but the bombs won't start falling until Nov. 6th, after the election. Besides insulating him from political backlash (if we win back the Senate it won't matter anyway), it also allows us more time to prepare to unleash hell on Baghdad with the full might of our armed services with all logistics in place.