Day traders are the biggest problem the markets have. People treating money no differently than a craps player in Las Vegas. The commercialization like the baby trading stock online and the dude saying "I just bought stock in Shanghai, thats China" is ignoramous. The advent of the internet and real time observation of the movement of the markets has allowed people with no knowledge whatsoever of true long term investment strategy to treat the market as a get rich quick scheme, and for my part I could care less if all these people lost and got out. The perfect storm for the market to rebuild itself devoid of these people powered by sound investment towards long sustained slow steady growth.
Way back post WWII the propensity to save in this country was 10%. That is collectively US citizens saved 10% of their take home pay. The propensity to save had declined to 6% by 1960 had stayed about that level until the 1980s. The propensity to save went negative in the 1990s and was at one point -4%. That is collectively US citizens spent 4% more than their take home pay. The government then changed the method of calculation savings by counting payments on home mortgage as savings which brought the propensity to save back up to 0.4%.
It is difficult for me to understand how any one can argue this point before the financial crisis and certainly now.
A credit economy eventually has to fail; there is no other possible outcome. When employment is full or nearly so, people are positive and willing to take on credit especially when the credit is cheap and easy to get. However, there is a point when collectively the burden of servicing that debt becomes prohibitive. Collectively we simply cannot continue to borrow from Peter to pay Paul. When the borrowing slows the upward pressure on assets slackens then starts to decline.
Did anyone catch the unemployment stats released today? The economy does not get better with unemployment going up.
The first asset class to decline was residential real estate, then stocks now commercial real estate and fixed income assets. Once the snowball starts rolling down hill it will only pick up momentum. We have been in a recession for some months and now entered a period of deflation. Did any one notice that crude oil futures closed today below $50 / barrel. Wasn’t crude bumping $150 just a few months back? Other commodities have also cratered; Platinum, Copper, Silver, Wheat, Corn, Soybeans, Cotton have all declined 50% to 60% over the past few months.
I have expected the 7,500 – 8,000 level to hold for the stock market as measured by the DJIA. The average bounced off 7592 in 2002 and 7843 in 1998 so there is certainly support here. If this level does hole I would not be surprised to see a bear market rally back to the 10,500 – 11,000 range before the bottom falls out. However, the longer it stays at this level the greater the chances that the level will not hold. If the average closes much below 7500 I would not want to be in the way.
The really scary part today was the Treasury market. T-bills were trading today at 0.3% annual yield. The yields on T-Notes and even 30 year T-Bonds are falling like a ton of bricks. There are several interpretations out there, but this certainly looks like the big money boys have given up on finding the next hot sector in stocks or anything else and are looking for a safe place to park their money in spite of no return.
This mess is just getting cranked up. The private sector has maxed out on debt. The commercial sector has also maxed out given that the private sector spending makes the commercial sector go. And let’s not forget that the government national debt doubled during the Bush administration to $11 Trillion.
Great post. I wish I were less depressed....