It was shocking to see how quickly we crashed below the 7000 level for the Dow Industrials. It becomes surreal as you begin to wonder if there is any end in site to the onslaught. I was expecting the market to hold at 8000, but clearly that was too optimistic. It appears that the market has surrendered, which leads me to believe that we have hit rock bottom. The market and the overall economy are correlated though not synchronized. The Dow Industrials tends to serve as a leading indicator, so the markets tend to tumble and recover before the general economy follows suit.A look at the Great Depression numbers.
July 1, 1929 - DJI - 333.79 (peak before crash)
April 1, 1932 - DJI - 42.84 (market low point)
Most economists are predicting a rough 2009 for the US economy with hopes of recover in 2010. That being said, the market seems to have much of the angst and future problems built in already. There will continue to be negative economic news to come, with more layoffs and bankrupcies to be announced before we emerge from this economic meltdown. Yet, it is likely that the markets will soon creep back from the current sell-offs we are seeing. At today's close of 6726, we may find stability at this discounted level. The general economy is another matter. There are many storm clouds gathering and currently dumping on us, and we may not see the sunshine break through before the end of this decade.
The report of AIG's record loss of $61.7 in Q4 2008 will likely serve as a demarcation point for the market nadir.
Some rationality behind this thought:
- By bailing out AIG, the Feds in effect are protecting the entire global banking system from having to bring back on the books losses related to credit default swaps that were insured by AIG. The losses incurred by AIG are losses that otherwise would have ended up on the balance sheets of our already fragile banks.
- Additionally the Feds are aggressively infusing the economy with a huge economic stimulus plan. This should bring some short term relief to the markets.
The question of how we can afford to finance this stimulus plan is a different question altogether. One in which we do not have a good answer to. Government spending is difficult to wind down once it gets started, which in effect we are green lighting with the stimulus plan. The solution if we are not able to bring our spending in line is to create more government revenues. We will likely be moving towards a future of higher taxes to support our bulked up government. Although the markets boomed as Reagan and his successors drove down tax levels for businesses and individuals, we were running a troubling deficit fueled by foreign funding. We need to work towards a balanced budget. If higher taxes is a part of that equation, it is a bitter pill that we will likely need to swallow. One thing is clear, if corporate, individual, and market returns erode, the tax revenues from these deminished amounts will also lead to lower government revenues. So the first order of business is to triage the economic situation in order that there are companies, individuals and capital gains to earn tax revenues from. 2009 tax revenues for the US are going to take a huge hit from 2008 as this year there will be very little capital gains taxes collected by Uncle Sam.
If the market does indeed hold the line at 6500, it may not help those getting laid off, but it should indicate that the economy will eventually come around as well. It is human nature to think that when thinks are good that they will be better, and to think that when thinks are looking bad, that they will get worse. However, that is typically not the case. As the saying goes, "it is always darkest before the dawn." From the market perspective it is pretty freaking dark right now.
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