Stocks and commodities plummeted on Wednesday as the euphoria that carried equity markets to massive gains a day earlier gave way to nervousness that the broader U.S. economy hasn’t yet escaped the dangers of the credit crisis.
Has anyone else noted that we are no longer trying to avert a recession? Now the news stories all say that various actions are being taken in order to avert either a “deep” or “prolonged” recession. Expect to soon read about the steps being taken to end the recession without any formal announcement of its actually having begun. Of course, as M Horn likes to point out, the word recession has been redefined to a point of uselessness. Where it once meant “a decline in GDP for two or more consecutive quarters,” it now is a synonym for “the current mess.”
Whatever you choose to call it, the current mess is large and has quite a bit of room and reason to get worse. Mere economic facts are not enough to prevent the markets from spiking as it did yesterday. During these bounces facts are replaced by faith. Thus the believers know a cut in an interest rate, a not-so-terrible earnings report or the news that oil DECREASED to $104 is the leading indicator that all prayers will soon be answered. At times like these the thinking gets so magical that the Fed, or whomever, gets endowed with the power to make anything impossible come to pass. Thus for a few hours Mr. Bernanke was deemed capable of getting the Cubs to the World Series.
I have always been amused by the idea that the stock markets in some way reflect reality. The markets, like the monetary system itself, are a form of collective wishful thinking. Investors as a group convince themselves that a thing has a value and thus it does. Sometimes these values are connected to the actual needs and demands of the society: oil allows things to function, as does the Windows OS. However a high price is no guarantee of a thing’s pragmatic worth. Frequently a high price indicates only the desire to people to posses them. This explains why people have at different times in history paid exorbitantly for pieces of gold, tulip bulbs, the US dollar, and shares of Bear Stearns. These items’ only actual worth is if A) you want a metal that is both malleable and highly conductive; B) you are a horticulturalist; C) you have a fetish for wallet-sized rectangles of green paper; and D) … well, let me get back to you on that one.
It would be cynical to insist that a connection between a thing’s price and its usefulness is the exception and not the rule. But many people do act this way. Thus the “bigger fool” theory of investing, where the idea is to hope that you will be able to sell your investment to someone who is an even bigger fool than you yourself are. This point-of-view equates the markets with nothing more than a legalized Ponzi scheme. It is a POV that will sadly be gaining many adherents in the near term. There are some contrarians — I believe Mr. Buffet has made some slight amount by not following this course. I have no idea which is right. If I did I would have the funds to not be concerned about a current lack of employment.
Dead cat bounce: A temporary recovery from a prolonged decline or bear market, after which the market continues to fall. As in: “Even a dead cat will bounce if dropped from high enough.”