Fairy Tale One: Humpty Dumpty Has a Great Fall
On February 27 2007, the Dow Jones stock market index sank by more than 500 points during the day -- a follow through of an earlier collapse of the Chinese market index. It was the biggest hit that the Dow has taken since September 11, 2001, although not in percent terms.
As usual the financial press was ready with a raft of explanations, prognostications, rationalizations and rebuttals.
The party might be over, but on paper, at least, investor confidence is high and consumer confidence even higher.
Shades of 1999-2000
Remember Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market, by syndicated columnist James Glassman and Kevin Hassett, a one-time economist at the Fed? Published near the market top and around when Enron, World Com and other crooked corporate giants had already begun serious meltdowns, the book chivvied readers to "Buy anytime, hold forever," as well as use index funds -- basically baskets of stocks that represent the whole market. Only a few short months thereafter the market imploded. Nary an apology or explanation since from the authors. Not one, to the thousands of lay people who must have taken their expert advice to jump into stocks at the precise moment when real investors like Warren Buffett were cashing out.
Of course Dow 36,000 was only one of a crowd of improbable Dows: there was also Dow 40,000 and even Dow 100,000. The defining lunacy of the time was to believe that it was a time when rules didn’t apply. The “New Economy,” they called it, the shamans of the internet boom . . . true believers like telecom prophet George Gilder who went broke believing.
Why the fixation on this one index of about 30 stocks? Simple. The Dow Jones Industrials Average, to give it its full title, is the main marketing tool that brokers and analysts in the wholesale market use to con mom and pop investors into buying often just when they should be selling.
The DJIA numbers, which is what most people mean when they talk about the market being up or down, are seriously misleading because they don’t represent the whole market -- only a handful of very highly capitalized, very unrepresentative stocks.
It’s the DJIA that has been hitting new highs since 2006 -- to cheerleading and pom-poms from the press. But a lesser-known index, the Standard & Poor 500 (S&P500) shows what’s going on much better. A 10-year chart of the S&P 500 shows that it’s not hitting any new highs but is actually buckling as it struggles to regain its 2000 heights. In the process, it seems to have formed the two ominous peaks that symbolize what is known as a Double Top to stock traders. A Double Top is a classic signal of a potentially drastic reversal in the offing. And as if to underline where things could be heading in a hurry, Goldman Sachs bank, the fountainhead of financial speculation in the economy (Goldman’s former boss, Hank Paulson was hired as Treasury Secretary), has taken a wallop too. Goldman, note, is heavily invested in China and in the US housing market.
Moral of the Story: Anyone with their pension funds or children’s college money riding on this market shouldn’t bank on living too happily ever after.
Fairy Tale Two: Goldilocks and the Housing Bear
* There was a 14.4 percent drop in housing starts ( the number of new houses being built) in January 2007.
* 600,000 real estate jobs are expected to be lost in 2007.
* Borrowing based on home equity which has been pumping up consumer spending (6% of GDP at the peak) is declining.
* 1 trillion ($1,000bn) worth of mortgages are going to be adjusted upwards this year to higher interest rates. An exceptionally high number of these ARMs (adjustable rate mortgages) have been made to sub-prime or less than solidly credit worthy borrowers -- so the adjustment is sure to cause an avalanche of defaults and foreclosures.
OK. Some overstretched, low-end homeowners have got in over their head somewhere. So what?
Nouriel Roubini, economics professor at New York University, says the housing bust will pull America into recession. Mr. Roubini writes: “America faces a ‘reverse cycle’ where a credit crunch has hit before the slowdown, a rare pattern. Normally, recession comes first, setting off credit troubles in its wake. We have a housing recession, an auto recession, a manufacturing recession, and a real investment recession already present.”
Now here’s the kicker:
“If all this is happening in what the consensus terms as a ‘Goldilocks economy,’ what would happen if the economy slows down?”
And Goldie’s porridge looks like it could cool off in a hurry. Nobody has taken the . . . er . . . bull by the horns yet, but here is what Alan Greenspan, chief chef of the Federal Reserve from 1989 to 2006, responsible for whipping up more credit porridge than any one else in history, and the single most important figure in the US economy for nearly two decades, had to say over the last weekend in February:
“When you get this far away from a recession invariably forces build up for the next recession, and indeed we are beginning to see that sign.”
Moral of the Story: When even Uncle Alan says so, it looks like Goldie should watch out. At least one bear is back. And a great big one it is, too.
Lila Rajiva is a freelance journalist and the author of The Language of Empire: Abu Ghraib and the American Media (Monthly Review Press, 2005), and the forthcoming Mobs, Messiahs and Markets (with Bill Bonner, Wiley, September, 2007). She has also contributed chapters to One of the Guys, edited by Tara McKelvey and Barbara Ehrenreich (Seal Press, 2007), an anthology of writing on women as torturers, and to The Third World -- Opposing Viewpoints, edited by David Haugen (Greenhaven, 2006). She is currently working on creating her own website and finishing a new book on mass thinking.
Other Articles by Lila Rajiva
* Satan and
Sex Manias: Moral Panics and the Mob Mind