NEW YORK - A frightening picture for all to see on the Dow Jones Industrial Average; Red dripping everywhere as investors turned blue and nostalgic for Wall Street's infamous "Red Period" between 2008 and 2009. The Dow lost 634 points today and has now lost over 1900 points or 15% in just 18 days. The question is has anything changed in 18 days? If anything the world economy is better off after the U.S. raised their debt ceiling. Despite this positive consequence, the amateurism in Congress led to a fearful market and a historic downgrade of the U.S. credit rating.
The market began its decline the week before the U.S. debt ceiling was raised. The politicans decided they would grandiose their plans to fix the U.S. for everyone to see. And lost sight that these plans could be implemented at any point in time in the future while the U.S. needed a quick decision not related to these plans. The Dow lost 600 points that week but just like 2008 the political wrangling came to an abrupt end and a law was passed. The market soared early in the day only to finish slightly down on August 1.
August 1 was a manufactured day by Congress who decided to put themselves before the economy. A non agreement by Congress would have caused a worse crisis than 2008. Missing any payment would tarnish U.S. credit forever. At the end of the day, the minor incident was made huge but it still should have been forgotten after it was passed.
Since the deal was passed the market fell another 1500 points despite spending cuts not coming in the immediate future. This drop in the market has caused talk of another recession which has further lowered the markets.One Wells Fargo economist now says there is a 40% chance of a double dip recession but they add a caveat that it would be blamed on the imbalance of government.
The market has a polarizing affect on people who believe the world economy changes based on the market. The market in 2009 overestimated the world collapse by perhaps 3000 to 4000 points and that was during one of the worst crises in the last number of years.
Now the market is heading back towards recessionary pricing. Wiping off 20% in the last two weeks of investor wealth. The difference is every corporation in America is recording some of their best profits ever at the current time.
Corporate earnings are already at a new record. There is no evidence that the world economy has begun cooling or heading back into a recessionary environment. U.S. Steel the iconic steel manufacturer even recorded its first profit since 2008 and said they would be almost as profitable in the next quarter. Apple and Microsoft made a combined $13 billion in their latest quarters. And U.S. Banks including JPM, PNC and WFC all recorded near record earnings while having record capital levels. While even Bank of America made close to $4 billion excluding mortgage related issues which has no affect on their current operations. Caterpillar increased its revenue by 40% and earnings by 30% and even this would have been more without one time costs relating to their Bucyrus acquisition.
Warren Buffett says there is no chance of a double dip recession and he expects the economy to substantially improve by the end of the year. A bold call for the legendary investor who seldoms makes predictions less than a year away. The U.S. Congress debacle spooked the markets causing people to sell their mutual funds which has led to panic selling. Stocks are now out impossible prices and now would be the time to seriously consider almost any American asset with good long term economic prospects.
The market began its decline the week before the U.S. debt ceiling was raised. The politicans decided they would grandiose their plans to fix the U.S. for everyone to see. And lost sight that these plans could be implemented at any point in time in the future while the U.S. needed a quick decision not related to these plans. The Dow lost 600 points that week but just like 2008 the political wrangling came to an abrupt end and a law was passed. The market soared early in the day only to finish slightly down on August 1.
August 1 was a manufactured day by Congress who decided to put themselves before the economy. A non agreement by Congress would have caused a worse crisis than 2008. Missing any payment would tarnish U.S. credit forever. At the end of the day, the minor incident was made huge but it still should have been forgotten after it was passed.
Since the deal was passed the market fell another 1500 points despite spending cuts not coming in the immediate future. This drop in the market has caused talk of another recession which has further lowered the markets.One Wells Fargo economist now says there is a 40% chance of a double dip recession but they add a caveat that it would be blamed on the imbalance of government.
The market has a polarizing affect on people who believe the world economy changes based on the market. The market in 2009 overestimated the world collapse by perhaps 3000 to 4000 points and that was during one of the worst crises in the last number of years.
Now the market is heading back towards recessionary pricing. Wiping off 20% in the last two weeks of investor wealth. The difference is every corporation in America is recording some of their best profits ever at the current time.
Corporate earnings are already at a new record. There is no evidence that the world economy has begun cooling or heading back into a recessionary environment. U.S. Steel the iconic steel manufacturer even recorded its first profit since 2008 and said they would be almost as profitable in the next quarter. Apple and Microsoft made a combined $13 billion in their latest quarters. And U.S. Banks including JPM, PNC and WFC all recorded near record earnings while having record capital levels. While even Bank of America made close to $4 billion excluding mortgage related issues which has no affect on their current operations. Caterpillar increased its revenue by 40% and earnings by 30% and even this would have been more without one time costs relating to their Bucyrus acquisition.
Warren Buffett says there is no chance of a double dip recession and he expects the economy to substantially improve by the end of the year. A bold call for the legendary investor who seldoms makes predictions less than a year away. The U.S. Congress debacle spooked the markets causing people to sell their mutual funds which has led to panic selling. Stocks are now out impossible prices and now would be the time to seriously consider almost any American asset with good long term economic prospects.
when the government "owes money" or is late on payment who do they pay it to?. federal reserve?
ReplyDeleteAnyone that they owe to. The federal reserve can print money to give to the government to pay which would cause inflation but would pay off the bill.
ReplyDeleteThis is why the U.S. debt crisis is a non issue. Its an inflation issue but this can be fixed over time.
Downgrading the credit rating was extremely dumb by S&P.
with all the fraud that happened in 07-08 with the rating agencies (s&p included) giving aaa ratings to sub-prime mortgage loans ( cod's) you figure the american gov't would have paid them off as well to keep their rating?
ReplyDeleteor the S&P was stupid then and stupid now
ReplyDeleteAllan, a terrific piece. Every dip in this latest correction has seemed irrational. I had been largely out of the markets (bless Summer school), and just made some buys yesterday. There are some insane deals on stocks right now and I intend to cash in.
ReplyDelete