Explaining the Unexplainable
My own ability to remain philosophical about the stock market ended about 20% of my life savings ago. I must admit that I have become somewhat cynical in the last month as the market tests new lows on a daily basis. This has afforded me some enjoyment in the dark humor surrounding the pathetic attempts of the media and financial experts to explain why the market dropped another 5% on the previous day.
My favorite explanations revolve around addressing known facts as surprises thus prompting another market correction. The idea that our economy may be slipping into recession is particularly fascinating. Economist typically officially declare the economy in recession about the same time that a recovery is underway. Understandably, they are working on delayed reporting of data that meets their official definition. Most of us understand that when you can’t sell your house, your retirement savings are worth 50% of what they once were, you can’t borrow money and massive layoffs are daily news that we’re probably in a recession and it’s going to be a nasty one. The market dropped another 5% yesterday presumably because we didn’t know this until we got the minutes of the Fed’s last meeting.
Last week, the market took a beating when the Treasury Secretary Paulson told the Senate that they would not be buying bad assets, but instead purchasing stock in troubled banks. If my memory serves me correctly, that was good for another 5%. Excuse me, but wasn’t that decided over a month ago when the European leaders came to Washington and the British bailout plan got universal kudos?
The point is that there is no good explanation of what is going on in the stock market. Obviously, we are in a recession and when that happens, stocks go down. The wild day to day fluctuations are just an indicator that the people we were counting on in the financial community are not as bright as we had hoped. The correlation between pay and intelligence is not very high. Good old fundamental valuation techniques have been replaced with hysteria. Until the hysteria dies down and there is some stability in the market, even trending down, there can be no consumer confidence and without that, no recovery.
Oh look! Obama picked his Treasury Secretary and that’s good enough to increase the market capitalization of American industry 6%. Good grief.
Another hit for capitalism. While the Wall Street geniuses that reduced market value by 50% get 8 and 9 figure incomes. future Treasury Secretary Geithner will have to make due with his 6 figure government salary.
Richard Gabel
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