Daily Investment Interpretations

September 22, 2011

2011-9-22: (Thursday Night): 
    "Humpty-Dumpty sat on a wall;
     Humpty-Dumpty had a great fall,
     And all the king's horses and all the king's men
     Couldn't put Humpty together again.
    Stocks Plunge on Fears of Global Slowdown, Stocks thrashed in selloff.
    The NASDAQ Composite tumbled
82.52 points (-3.25%) to close at 2,455.67. The Dow plunged
391.01 points (-3.51%) to close at 10,733.83; the S&P 500 free-fell 37.2 points (-3.19%) to settle at 1,129.66. Oil dropped to $80.79; gold fell to 1,781: Gold slides as dollar gains. The VIX gained 4.03 points to 41.35
    State of the Markets articles include:  
    Technical Talk: It's Not Pretty But Still a Range. The markets closed today above their August-September trading-range low (1120 on the S&P).
    China's "Flash" PMI Below 50 For Third Consecutive Month  
    FedEx Beats EPS Estimates But Reduces Full-Year Guidance Range  
    Weekly Jobless Claims Remain Elevated  
    Bloomberg Consumer Comfort Index Heads Lower
    LEI (Leading Economic Index) Above Expectations in August  
    FHFA House Price Index Up Again in July  
    Market Mover: EU Looks to Accelerate Recapitalization of 16 Banks  
    And Marketwatch articles include:  
    Insiders say sell? Maybe not  But then again, maybe so.  
    Market facing huge test Thursday  
    Market passes its test—again. The markets closed today above their August lows, thus passing today's huge test... for now.  The market will turn around, Barclays' Knapp says, Dow close below Aug. 10 low could lead to 'tradable bottom', says Mark Hulbert.
    Deep dive in 30-year yield  Paul Krugman has a couple of paragraphs dealing with the fact that as of this morning, the interest rate on 10-year Treasury bonds had dropped to 1.77% (it's fallen to 1.71% tonight, setting a new record): Permanent Link to One Point Seven Seven. Two-year Treasuries closed at 0.19% interest tonight. Then Dr. Krugman reminds his readers that two years ago, the Wall Street Journal and Niall Ferguson argued that the Federal stimulus program would bring on the bond vigilantes and send interest rates soaring. And what's important about this is the reasoning and disastrous economic game plan that has accompanied this fallacious forecast of what would happen. Back on January 11, 2009, Dr. Krugman in "Permanent Link to A scary analogy, quotes Mark Thoma, who likens the stimulus package to driving up an icy hill. If you don't tackle the hill with enough initial momentum, you risk sliding back down before reaching the top." And now, here we are, threatened with sliding back down the icy hill.
    Dr. Krugman follows this up with a quotation from Ecclesiastes, expressing his despair over the endless governmental commitments to austerity at a time when governments can't afford to be austere. The time for austerity (I think he would say) is when you're prospering. That's when you lay aside savings for a rainy day (or days). But once the monsoons arrive, you either live off your "rainy day fund" or you borrow to keep yourself going until the rains pass. Except that this analogy is a little different for governments. Governments (especially the U. S. which prints the world's reserve currency) can make the rain go away, and can take advantage of the increased prosperity to repay their loans. Or to put it another way, recessions (1) cut government tax revenues while (2)  simultaneously increasing safety-net outlays. Dr. Krugman's frustration stems from the fact that in spite of knowing now that their forecasts of rampaging interest rates and inflation were wrong, our movers and shakers keep on marching straight downhill in defiance of reality.
    It can't be said too strongly that government debt doesn't work like private household debt. It's more like corporate debt or agricultural debt. Why are we running huge deficits right now? Why are our deficits so much larger than they are in a booming economy? Because we're in a recession. And the sooner we get out of recession, the sooner we can trim federal spending. 
    On January 5, 2009, I wrote:
    "Paul Krugman has bad news: Permanent Link to Is Obama relying too much on tax cuts?. Dr. Krugman's point is that the Obama team may be showing weakness in confronting the Republicans over the incoming administration's economic stimulus plan, and that some leading Republicans and their political consultants may be moving in for the kill. Offer a 40% tax cut and the Republicans will demand 100%. The Republicans will also demand cuts in corporate taxes. Dr. Krugman observes that Republican minority leader Mitch McConnell is already "moving the goal posts". (Senator McConnell has a reputation as a shrewd political tactician.) This could possibly, I should think, lead to a squandering of the $1 trillion economic stimulus program, and a deep Depression.
    Obviously, the party that is out of power has every incentive to sabotage the policies of the party that's in power. Would that extend to ruining the nation? I suspect that, as far as some Congressional representatives are concerned, that wouldn't enter into their personal calculations. Witness the former members of Congress who are behind bars, and consider that this is probably just the tip of the iceberg. I would imagine that there are many Congressmen and Congresswomen who are outstanding public servants, but if you pick the worst out of 500... Some of our most successful are apt to be guided by what's best for their power bases and their prospects for re-election. ("What have you done for the Party lately?") So things may not go altogether smoothly for an economic rescue program.
    Stock market futures are up ¾ % tonight, probably in a technical rebound.