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Jon Talton

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

June 15, 2009 at 9:53 AM

The dirty little secrets behind the Dow’s recent rally

Top of the News: So what’s bugging the Dow now? Behind all the technical talk is perhaps a realization that this has been, indeed, a sucker’s rally.

A real rally is based on something, well, real. This rally more and more seems to have gotten its chops from financial plays. In other words, little bubbles to replace the big one that started collapsing in 2007.

For example, The Wall Street Journal today interviewed the managing director for a hedge fund “which has recently been unwinding profitable bets on the United States Oil Fund, an exchange-traded vehicle that tracks crude prices.” Exiting bets like this is helping drive the market lower. Your 401(k)s at work…

The unreality continues with a report that hedge funds enjoyed one of their best months on record in May. Yet these financial plays have little to do with the real economy.

For example, the double-whammy faced by Boeing with both its defense and commercial divisions facing downturns. Or the meltdown of the domestic auto industry. Or continued weakness in consumer spending because of job losses, high debt and lack of the magical “home” equity loans of the past. Or the loan losses still looming over financial institutions.

I could go on…

So it’s hard not to escape the impression that much of the market continues to be divorced from the productive economy. This is only strengthened by speculation that investors are pulling back because stimulus efforts are winding down worldwide, or that the big players are afraid of an overhaul of financial regs to be rolled out by those socialist tools, Larry Summers and Tim Geithner.

The Back Story: If you missed it, be sure to check out the Seattle Times annual ranking of the largest companies in the Northwest. It’s sobering that the list of 100 was trimmed to 87 for the first time in the 18 years of the report’s history.

Much of this may be laid at the feet of the great recession. But something needs further study: Are we doing a worse job here creating companies that will grow and stay? Lately entrepreneurial successes are quickly sold off to outsiders. This isn’t the reinvention DNA that allowed the region to replace timber with Microsoft, Starbucks and Nike.

One of the worst outcomes of the Great Disruption would be to leave the Northwest, and especially metro Seattle, in the same condition that industry consolidation has left many metros over the past quarter century: as mere back offices and “markets” for gigantic companies based in a handful of fortunate cities.

Today’s Econ Haiku:

Tim and Larry’s rules

To make sure that fox is safe

Guarding the hen house

Check out the winner of last week’s haiku poll here.

Comments | More in Aerospace/Boeing, Macro/Big picture, Stock market

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