Stormy Weather on the Stock Exchange

I shouldn’t gloat. It’s like cutting off my nose to spite my face. Because when Wall Street sneezes, working people get pneumonia.

But I remember that film clip from ‘Fahrenheit 9/11′, when President Bush is in a tuxedo talking to his base, ‘the haves, and the have mores’. I wonder if his popularity sinks a bit when the stock market tanks like it did this week. All those valuable families losing dividends.

If you run a small business, like ‘Miss Fannie’s Soul Food’, and the cash flow gets too tight, it’s your problem and you close your doors. If you run a mega business, and the cash flow gets too tight, you remind the Pres that you are his base, and if you go down you’ll take a lot of people down with you. The government changes the rules, prints up some Bush Bills, and the stock market is happy.

It’s not so happy for us when it takes more Bush Bills to pay for the gas and the groceries and the heat and the tuition. But a system built on ever-rising profits from endlessly expanding consumption cannot possibly last. It’s a positive feedback loop, totally unsustainable.

So I laugh when I see the Dow go down, even though I know that it’s me who’s going to get hurt.

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2 responses

  1. “Hurt” is relative; if you have a mutual fund based retirement account, “hurt” is a loss of 20-40% of its dollar value in a week, if you really needed the cash. Of course the history of value in stock over time is an upward slope, not downward and if you had put $10,000 into a reasonable retirement accournt in 1985, it would be worth $30-40,000 today even with the current downturn. That marvelous man, Albert Einstein, was once asked what was the most amazing fact he had learned in his decades of inquiry. Einstein answered, “the power of compound interest.”

    To a real extent the up and down of the stock market means not a whole lot to our real day to day lives, and a case can be made that the surges and retreats on Wall Street indicate not much more than lots of people playing financial genius in a situation that mostly has nothing to do with reality. The reality of course is that in an economy valued at $8-9 TRILLION dollars, whether a financial company loses $10 BILLION dollars is less than a pimple on an elephant (1 TRILLION dollars is 1000 BILLION dollars); the mathematics is inescapable. About 92% of home loans are conventional and about 8% are the “bad” loans and of the 8% bad, about 15% of those are in default, and again the math is inescapable. Unemployment overall is at about 5%–these numbers really are difficult to measure, but about 95% of the work force is working, a number that in any reasonable world would be considered better than good and last month there were fewer unemployment claims than expected, again very positive. Of course there are bumps along the way, but it is important to note that the current “noncrisis” is the result of a lower than hoped for growth rate, not a negative growth rate and inflation is still very low as compared to any real measure. Certain issues are made by us: the high cost of energy is largely the result of a cartel of providers and a lack of will by us to produce more. Within a decade, the cartel’s grip on energy resources could easily be broken, if there was a national will to produce more energy.So the best advoce is to hold on to your mutual funds, like the South, the market will rise again (and a $12,000 market is higher than the market last year), and remember Einstein’s discover, the power of compound interest.

  2. Mr Wolberg, I pretty much agree with you, but there are a couple of things.

    You are correct about the money invested in 1985. However, that same $10k invested in 1966 would have been worth about $10,001 in 1981 (slightly shorter time, but the point remains). Second that’s an extra nominal buck; in real terms, you lost your shirt because of the inflation of the intervening years.

    Third, we are constantly told that “historically, stocks return 7%” over the long haul. True. But what is left out is that, for most of the period under discussion, 3-5% of that return came from dividends, and not from capital appreciation (a rise in the price). Problem is, during the 90s, dividends became considered old-fashioned, and most dividends are in the 2-3% range. So, that 7% becomes much more of a stretch.

    And yes: Citi loses $10B, and it’s nothing. Except for the jobs that get cut to preserve the mega-bonuses for the people on top.

    So yes, the market will rise again. But when? We’ve been in the greatest bull market in history. It’s lasted so long that people forget that stocks go down, too. That leads to people taking stupid risks, which leads, eventually but inevitably, to big losses.

    A 15-year period of flat growth, or even decline, could easily happen, and would seriously crimp a lot of pension funds. That’s why so many companies are hell-bent on switching to 401(k)s, so the employee is on the hook in the event of a prolonged down market.

    Bear in mind that stocks don’t pay interest that can be compounded.

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