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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

March 5, 2009 at 10:10 AM

What’s bugging the Dow?

Top of the News: For years, the Dow Jones Industrial Average was out of sync with much of the real economy. The Dow rose while wages stagnated and income inequality increased. The Dow rose while deindustrialization claimed millions of jobs, especially in the Midwest. The list goes on. Now, sadly, the Dow is in tune with the real economy. What’s spooking the market? Let me count a few of the ways:

1. The banking system. Some of the money center banks are probably insolvent and the shadow banking system upon which it depends is teetering. This is why Warren Buffet in 2003 called derivatives “financial weapons of mass destruction.” This dog’s breakfast that included credit default swaps and mortgage backed securities is now largely worthless or worth much less than the banks’ balance sheets show. Moody’s today warned that some of the biggest banks face credit downgrades. The Treasury has yet to inspire confidence that it can fix this mess. Some worry if Geithner is up to the task.

2. GM and GE. General Motors auditors told us what we already knew today — the company’s future is in doubt, and with it a huge supply chain and much of the economic well-being of several states. As for GE, it is struggling with, among other things, the credit arm that was one of the proudest accomplishments of wonder boy Jack Welch. GE infused $9.5 billion into GE Capital, and the situation still remains dire. And you thought GE just made light bulbs. Bottom line: When what were the safest of blue chips are in trouble — GE even slashed its dividend — it’s not a good sign.

UPDATE: Guess who’s undergoing a bank “stress test”? General Motors’ former wholly owned subsidiary, GMAC.

3. Job losses. The big investors that run The Street have finally awoken to the fact that rising unemployment — along with the hit to the wealth of average Americans from declining house and 401(k) values — hits the biggest part of the economy, consumer spending.

4. A global recession. No economy is moving against the downward cycle. Former tigers like Ireland are running fevers in their cat baskets. The EU, China, Japan, India and Malaysia are headed down — and, tellingly, today China’s premier today declined to unveil a hoped-for stimulus plan. The global nature of the downturn is a major factor behind Boeing’s growing woes.

5. Unwinding contracts. Many big players caught in the recession are leveraged to the hilt and desperately trying to sell stocks to get liquidity and unwind their positions. This was one of the factors behind falling oil prices as well.

6. There won’t be another bubble anytime soon. Back in 2002, money fled the tech busted stock market into a housing bubble ignited and sustained by the Federal Reserve. Now the Fed has cut interest rates to effectively zero — the European Central Bank has followed suit — but this is little help in a credit-and-debt crisis of this magnitude. As Alan Greenspan once said, “you can’t push a string.” (And, sorry, you can’t run an advanced economy on Wal-Mart alone).

This doesn’t mean the stimulus won’t increase employment and productivity. It will, even with its flaws. But that anticipation can’t overcome these present issues.

The Back Story: Cue Alanis Morissette music, please. All this talk of “the D word” — i.e., are we in a Depression, should remind us that the word was actually coined by Herbert Hoover, or his aides, as a less fearsome term than the 19th century word “panic.” Isn’t it ironic?

Today’s Econ Haiku:

My AIG itch:

Who are those ‘counterparties’

Getting our money?

Comments | More in Banking, Consumer spending, Macro/Big picture, Stock market


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