Posts Tagged ‘economy’
Wednesday, April 8th, 2009The stock market is typically 5 or 6 months ahead of the economy. That is what we are led to believe; actually many bear market rallies are predicated on this theory. Does it really?
We heard the declared bottom ring in November 2008 when the Dow Industrial Average hit 7552. So according to the Stock Market fortune teller the Dow Industrial Average should not have broken the 7552 level in February and economy should be on the rise by now. Unfortunately this prediction has been proved wrong this time.
One thing is for sure; eventually it will be right (assuming you believe the World’s economies will recover at one point, I do). One of the eventual lows will be preceded by growth.
Sounds kind of like a convenient statistic, where they fail to disclose the accuracy. Over the past year, how many times have you heard “bottom”, how many times has this fortune telling ability been right?
Lately the fortune telling ability of the stock market has been the reason “you can’t afford not to be in this market” according to the mass populous on Wall Street. It may eventually be true, but can you afford its accuracy?
Tags: Dow Industrial, economy, investing, investment, recession, stock market history
Posted in Stock Market Actions | No Comments »
Tuesday, April 7th, 2009The US Government in one breathe attempts to sink the Dollar in the next speaks of a commitment to a strong Dollar. Even with all of their “innovative” methods of sinking the Dollar, it just keeps getting back up. The Dollar of recent has the resilience of a “Rocky” opponent.
So what keeps the Dollar moving up even in the face of such dramatic attempts to keep it down? Probably the most obvious is that the rest of the world is in worse shape than the USA. The old saying goes “if the USA gets a cold, typically the rest of the world gets pneumonia”.
With the US Government printing money at a feverish pace, other countries that are dependent on exports to the USA must do the same to keep their currency in pace. This process seems to extend the financial pain and fuel social unrest.
The Dollar is the Ocean eroding the cost of goods and services in the US, the solutions so far are looking like poor conceived Jetties, which typically cause more harm than good.
Tags: dollar, Economics, economy, money, recession, USA
Posted in Economics, Federal Reserve Actions | No Comments »
Saturday, March 28th, 2009Is it possible the Dow Industrial Average really could descent to 1529? The answer is absolutely yes.
From 1929-1932 the Dow Industrial Average went from a high of 381 to a low of 41 (closing prices). The index corrected 89.2% in about 3 years. So if the Dow Industrial went down 89.2% from its high of 14,164 that would leave us at 1529.
In December of 1903 the Dow Industrial Average touched 44. On September 3rd, 1929 the Dow Industrial reached 381. In 27 years the Dow Industrial Average grew 865%. On April 21rst 1980 the Dow industrial Average was 759. On October 9th, 2007 the Dow industrial average was 14,164. In 27 years the Dow industrial Average grew 1866%.
From September 3rd, 1929 (Dow 381) till April 21rst, 1980 (Dow 759) the Dow Industrial Average grew 199%. So it took over 50 years to grow a little over 199% but in just the last 30 years the Dow was able to grow nearly 10 times that.
So even if the Dow where to go to 1529, that still would be a 201% gain on the Dow Industrial average over 30 years which is not bad considering the last 80 years.
I am not saying that this will happen, but I definitely feel as though the last 3 decades have been somewhat of an anomaly. Remember price is determined not by Wall Street professions, it is determined by demand. If investors are unwilling to accept the risk of equities (stock), then the perceived value is worthless.
Dow Industrial Average from 1929 till 1980
Tags: average, crisis, demand, dow, economy, index, industrial, market, stock, stock market history, supply, USA
Posted in Economics, Side Notes, Stock Market Actions | No Comments »
Friday, March 27th, 2009Several weeks ago when the US Stock market was selling off with no bottom in sight we heard much of the financial populous using the term “capitulation”. Capitulation is defined by Webster’s dictionary as “surrendering or giving up”, traders characterize it as panic selling typically accompanied by large volume. Many professionals look at capitulation as a way to capitalize on another’s emotional bad decision. If the masses, “mob”, sells out then the market would have nowhere to go but up because all the sellers are gone. The theory is that it pays to contrarian.
Interesting how we really never did get this day of reckoning or “capitulation”. Instead a steady flow of relatively good news has spurred the major average up near 20% in a matter of weeks. With several weeks on a roll we have heard (not from all, but a large majority) from public officials, investment professionals and financial press that we may have seen the worst of this economic crisis.
If it pays to be contrarian then don’t you lose if you are part of the mainstream? Could the market be doing the same as capitulation but on the upside, panic buying for their jobs? Remember Wall Street suffers long term in a bear market.
President Herbert Hoover (31rst President of USA 1929-1933) on May 1, 1930 stated that United States was not through all its difficulties but he believed that United States had been through the worst (taken from The World in Depression 1929-1939 by Charles P. Kindleberger)
Red Circle Indicates End of April Beginning May 1930 Dow Industrial Average
Tags: bear, bull, chart, depression, economy, goverment, market, stock, USA
Posted in Books, Economics, Stock Market Actions | 1 Comment »
Tuesday, March 24th, 2009The simple answer is, prices coming down on goods and services. There are two types of deflation, good and bad.
Good Deflation:
Prices of goods and services are improved due to innovation either in manufacturing or in product delivery (i.e. inventory management).
Bad Deflation:
Prices of products and services are pressured by a lack of demand at current price level and demand can only be spurred by a price reduction. Some people actually feel as though bad deflation is a way of deflating an over inflated economy. When prices are forcefully reduced due to economic pressures, this causes increased unemployment, which perpetuates the situation. Companies must let people go to be able sell their products cheaper. This in return pressures the remaining workforce to pick up the slack without increased wages.
Many people may say that my definition of deflation is not descriptive enough to all the moving pieces (i.e. monetary value), but to me it is a simple way to identify and understand this potently destructive force.
Tags: deflation, Economics, economy
Posted in Economics, School | 2 Comments »
Sunday, March 22nd, 2009We as the people of the United States are at a historic impasse where we can either band together to get through these hard time or fight and create a hostile environment where recovery is more difficult and prolonged.
When viewing an economic crisis over history many economists strictly view the flow of money, whether it is spending, lending or monetary. My view is somewhat more of the psychological viewpoint of the masses. If we strip out the dollars and cents of a crisis what we are left with is the acceptance of a failed endeavor.
We as individuals are able to handle extremely difficult stresses in life by going through stages of acceptance to finally moving on. As pointed out by Gustave Le Bon in The Crowd the individual is typically smarter than the crowd. As an individual we cope much faster with a crisis then the masses. Since this crisis is affecting so many people it makes it harder as an individual to go against the irrational actions of the crowd and move toward the somewhat obvious solution.
So instead of acting out of anger, we need to think as individuals and act rationally. If everyone thinks as an individual rather than part of the mob we would make more progress toward the resolution of this difficult time.
Unfortunately, if history is any indication of the future, people will jump on the bandwagon and the resolution will be prolonged and full of irrational behavior. Interesting that it is not the economic factors that determine the outcome, it is the human action.
Tags: econimics, economy, Gustave Lebon, the crowd, US, USA
Posted in Books, Economics, Side Notes | No Comments »
Friday, March 20th, 2009Well, like the Great Depression it will be debated for years to come and will still come down to theories. Well here is my theory.
I believe that the cause to this terrible economic world disaster is simply RISK. If you look at the following chart of the Dow Industrials from 1928 to 2009 you will recognize the last 30 years seems to be an anomaly.
Dow Industrial Average from 1928 to 2009
When an index like the Dow Industrials grows to levels like it has over the past thirty years fundamentals can only explain so much. Money is what makes a market climb like it has over the past 3 decades. Simply the more people investing in stock makes the market grow. So basically a generation decided that they were going to accept more risk than their parents did. Their parents had kept the market at bay, since they did live through the Great Depression and understand what can happen when you accept too much risk.
If you look at the last generation who lived through the Great Depression their retirement from the workforce coincidently coincides with the beginning of this current run up in the market. In the early 1980’s the USA had a savings rate of nearly 10%, in 2006 we were at a negative savings rate (spending more than we made). Over the past 30 years we have accepted more and more risk into our lives and now are dealing with the rebalancing in my opinion. We tend to forget if we do not have someone continuously reminding us.
Tags: depression, economy, great, money, retire, retirement, risk, save
Posted in Economics, Stock Market Actions | No Comments »
Thursday, March 19th, 2009Are they serious? The US Federal Reserve yesterday took significant action to promote lending and restore growth to the US economy. The Federal Reserve cited the following reason for the dramatic action:
Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession.
Inflation will be an issue in the USA when it actually starts growing instead of contracting. Read the above statement from the Federal Reserve, does this seem like growth is around the corner? If growth is so close, then why has the Federal Reserve taken made such a bold move? I think that Deflation is the real concern here. Remember that we can stop inflation; Deflation is the real scary one, especially since the Federal Reserve has already thrown the kitchen sink at the problem. It is funny how the stock market always seems to be so ahead of the news without actually thinking about the now. It is true, low rates makes growth easier because of the cheaper cost of money, but to get to the ending you have read the whole book.
Annual inflation rates in the United States from 1666 to 2004
Tags: deflation, economy, federal reserve, inflation, invest, investment, US, USA
Posted in Economics | No Comments »
Thursday, March 19th, 2009
Ben Bernanke US Federal Reserve Chairman
Okay so our beloved fed reserve chairman has come up with a brilliant way of killing the rest of the world economies, at least until they catch up. So what happens when you are the largest consumer in the world and you try your hardest to kill the value of your currency? Well you manage to make the life of countries that live off you harder. I call this protectionism, devaluing your currency in the face of a world recession is a real low blow to those countries that depend on you for your consumption. Now the other side of the coin is that large USA companies will benefit in the short term (a little protectionism), but what happens when those foreign economies you’ve damaged find their recession deepening because of currency exchange. Well large US companies, who receive a significant source of their revenue from overseas, will start to suffer on softening foreign sales.
The actions the Federal Reserve took yesterday are intentioned to expand credit in the United States, but isn’t that what started the problem in the first place. To me it seems like our Government can’t give up the past to move onto the future where we you don’t need a new car every 2 years and 5 LCD televisions per household. We need to focus on letting the market go through the difficult process of price discovery and start saving real money instead of looking at credit as a safety net (i.e. credit cards). The US government should stop trying to fix it and maintain the laws instead of inventing new ones.
Just my opinion.
Tags: ben bernanke, credit, economy, money, recession, US, USA
Posted in Federal Reserve Actions | No Comments »
