Dow 7000?

November 19, 2008 by Pelikan
Filed under: Fannie Mae, Freddie Mac, Ohio Economy, U.S. Economy, U.S. Financial Crisis 

Back on October 6, I predicted - well sort of predicted by writing a headline on some market news aggregation - Dow 8,000.  Based on the economic and financial industry news of that day just 2 1/2 months ago (seems longer) the Dow dropping to 8,000 and staying in that vicinity for some period of time seemed reasonable.

At the time we had been through Fannie and Freddie, Lehman was failing, more banks were failing and the federal government and media began explaining things like credit default swaps to America.  Things looked bad, but some were still touting the “fundamentals” of the U.S. economy and the publicly traded companies on our major stock exchanges shouldn’t pay too high a price (with dropping share values) for the excesses of the financial services industry.  Also at that time, I was reading Kevin Phillps’ book, Bad Money.  If you want a better understanding than the average bear - or bull - of the current U.S. financial system Bad Money is a must read.  At any rate, under the influence of that book, it was just obvious that as stocks dropped sharply that day there were probably many more shoes to drop, hence the market wasn’t at the bottom yet.

Now I’ll revise my estimate.  On top of the crisis in the financial system and all that it entails, from failing banks to a still too tight credit market there are many more economic indicators pointing to the final quarter of 2008 just being the beginning of a difficult economic downturn.  Here are a few things that immediately come to mind:

  1. Jobs - Job losses mount and job creation lags.  Citi Corp. announced the largest single cutback in people ever in the last week with plans to cut 52,000 employees.  Here in Ohio, 2008 has brought the double whammy of DHL and GM closures with job losses of around 12,000 combined.  Even the once vaunted ’service industry’ which was supposed to employ all of the Americans who used to work in manufacturing took a huge hit with the closure of 600 Starbucks - the same Starbucks which was one of the few service industry employers with even half a soul.
  2. Deflation - Stocks fell today partly on news that the Consumer Price Index fell by 1% in October.  This was the largest drop in the history of this measure of what consumers pay for food, clothes, and other goods and services.  The spectre of deflation is upon us and it doesn’t just mean paying less for milk.  For some, it will mean more job losses as businesses make cuts to deal with less revenue.  When prices drop, already in-place salaries and wages don’t. 
  3. Housing and Real Estate - Building things means jobs and there’s not a great deal being built relative to recent history.  We all know housing construction has been down.  Part of this is a glut of foreclosed homes in some markets.  What else is at work is tight credit markets.  A little anecdotal evidence: A friend of mine took a trip to Las Vegas two weeks ago.  He said he saw no fewer than four major construction projects on or near The Strip simply shut down midstream.  He asked a native what was up and the reply was “funding dried up.”
  4. The Big Three - The major U.S. automakers - GM, Ford and Chrysler - have spent more time and energy recently begging for a taxpayer bailout than they have re-thinking their current strategic position in the world’s automobile market.  The statistic that 1 in 10 U.S. jobs is related to the auto industry has been thrown around quite a bit lately.  I have no idea if it’s true.  What does seem to be true is that between the largesse of the corporate car titans and the United Auto Workers, these venerable brands may be dying.  Great timing guys!  Today’s closing share prices: GM, $2.79; Ford, $1.26.  In another round of hearings on a proposed Big Three Bailout, all three CEOs of GM, Ford and Chrysler flew to Washington, D.C. in their private jets.  That’s three separate corporate jets to ask for our money.
  5. Globalization - In the early days as the U.S. financial crisis began to take hold, our European friends smugly rolled their eyes and wagged their fingers.  Oh, the arrogant piggish Americans.  Within weeks they were in as much trouble as we were.  Everything is bought and sold everywhere these days.  That includes unregulated, speculative investment vehicles like credit default swaps(CDS).  It’s estimated that the size of the CDS turd in the world’s punchbowl is $50 trillion.  Looks like there are capitalist pigs everywhere.
  6. Recession - Is it here or isn’t it?  Technically not yet but it seems like a foregone conclusion.  It has arrived in Europe.
  7. Bank Failures - There’s been 19 this year. 
  8. Layaway - It’s back.  You can go down to JC Penney or KMart and actually put something on layaway just like in the olden days before teeny boppers had their own credit cards.  I’m just old enough to remember an America that when you wanted something that wasn’t a car or a house you saved for it or you put it on layaway - paying for it over time and not getting it until it was paid for.  Layaway coming back may be the best sign of the times.

Back on October 6 when I was reading Bad Money, the financial crisis was taking off and the Dow was dropping, 8,000 points or thereabouts seemed a likely bottom - it just felt like there were more shoes to drop.  They have and it still feels like there’s a ways to go for the bottom.  I’m revising to 7,000.

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