"Anybody see $3 Trillion laying around?"
Well, I started to write about money and the market yesterday, but chose something I'm more interested in instead. Had I written about the market yesterday, the post would have been about not trusting the rally of the past few days.
Sure enough, the market dropped a bunch yesterday...again. It closed under 11,000. For those having trouble with the practical application of the market swings, look at it this way. Folks who had $125,000 in a retirement account around the beginning of August on average only have around $111,000 right now. Translating the point drop to dollars, in really round numbers, 500 points is $1 Trillion. So the 1500 point drop in the Dow represents around $3 Trillion that has simply evaporated since August 1.
The markets are pretty strongly predicting another recession. During the last recession, the Dow briefly dropped as low as 8,000. It climbed back to 12,500 mostly in hope, not data. The market hoped that throwing a trillion dollars at the recession would have some impact. The market hoped that unemployment would ease, people would start buying houses again, income tax revenues would rise (because people made more money, not because tax rates increase), Europe would experience similar results and energy prices would be more reasonable.
Instead the market got a bunch of currency manipulation by China, the U.S. Treasury buying back its own debt with made up money, a pretty ineffective stimulus package (unless you're a big bank or car company), absolutely no good news from Europe, a credit downgrade for the U.S. and now a recession warning from another well respected economic fortune teller.
The markets are expecting rough waters ahead as the hope becomes more like wishful thinking. It is pricing equities accordingly. But there are two things the markets can't factor in because they haven't been seen before and nobody knows what their impact will be.
The first is the inability of governments to repay its debt. We skirted around this issue on a federal level for now, but several European countries, a few individual states and a whole big bunch of municipalities haven't been able to. For the markets, this is scary.
Second, if we do enter another recession, the government is just not in a position to throw another trillion or few dollars at it this time. Additional debt is as harmful as the recession at this point. The markets know that the government can't buy its way out of another recession, but can't possibly know what the actual impact of that situation will be.
So What? What's the take-home here, except to be all negative and depressed about the economy?
I think that's what I want to focus on for a while in my thoughts and therefore in my journal. I think there are some things we can do to prepare for and at least survive, if not prosper, should fears of a recession that the government can't fight come to fruition.