24 October 2008

Strange Days Indeed

It is, I think you will admit, a strange day indeed when we can look at the major US market indexes closing the day down 3-3.5% and call that a good thing; and look at the plummet in oil prices and strengthening of the dollar and call that a bad thing.

And yet, that's where we find ourselves today. Friday in Asia was a financial bloodbath, with the Nikkei (Japan) and Heng Seng (Hong Kong SAR) giving up 9.6% and 8.3% respectively before the opening of US markets. Overnight futures trading for the Dow and S&P had to be halted until the opening bells because they hit the "limit down" thresholds. Everyone expected today to be another dramatic crash in the US, as well.

In the end, despite a pessimistic start, bargain hunting, contrarian investing, and G-d knows what else kept the day's losses on the Dow 30 to 3.6%, S&P to 3.5% and NASDAQ to 3.2%.

The market continues to slide despite the thawing of the credit markets--they're not yet fluid but they've at least moved from pack-ice to slush. The problem now is that frostbite has already taken its toll. What we're seeing now, to use a somewhat graphic metaphor, is the sloughing off of flesh killed by the cold.

You see, public companies tend to only react to thinks in quarterly bursts. That's when they have to post their financials, and so that's when they tend to make big pronouncements to go along with those financials. A company that's doing well, and expects to keep on doing well, will post its massive profit and announce how it intends to build on its success. A company that's doing poorly will announce its painful loss and follow up with what it intends to do to return to profitability.

Well, there have been a lot of losses to go around, this quarter. Banks, of course, are hosed. The automobile industry, as I've described in the past, was already reeling from oil prices killing demand for their biggest sellers, and then further crushed from several directions by the credit freeze. Manufacturing in general is falling off the rails (and it wasn't really doing all that well to begin with due to over a decade of open-market, free-trade policy, which predates Bush, lest you forget and blame the shrub for everything).

Then there are the job numbers. Unemployment stands at a nationwide average of 6.1%, which is hardly dire by 1930s standards but is well above what we've gotten used to. Many of those corporate earnings announcements came coupled with announcements of layoffs, which means the only direction that number is going is up.  Even privately held Chrysler chose to join the herd and make an announcement that its cutting 25% of its salaried staff. And despite good numbers from Apple, Google and Microsoft, Big Tech is not immune: Yahoo! announced a big layoff, too.

Even in the best of times, which not even the most contrarian pundit is prepared to suggest these are, announcements like these could cost the Dow 3% or so. So in the end, the fact that we held to only a "normal" fall-off for the day, compared to what happened elsewhere, is definitely good news.


Meanwhile, oil is way, way down compared not only to the stratospehric highs of the summer, but the prices we'd seen for the last couple of years. Along with it  has fallen the price of gasoline--I could have paid $2.29 in Saint Paul this afternoon, for example, except that I filled up yesterday at $2.39, same station.

The dollar, in turn, is strengthening after a long decline. That should be good, right?


The strengthening dollar is the easier one to explain. The dollar is not getting stronger because our economy is so great, because of course, our economy is in tatters just like everyone else's. The dollar is getting stronger because other countries are faring even worse, and their currencies are reflecting it. The currency markets are basically saying that, even now, when the US has demonstrated massive national fiscal irresponsibility and helped to trigger the crisis that's got everyone in a panic, the dollar, and various dollar-denominated assets, are the best of a bad lot.

So basically, the dollar is stronger because the currency system is all interlinked instead of being based on a common, independent standard like gold or silver, and thus, it's all relative.

The price of oil crashing is a bit more of a mixed blessing than truly a bad thing, because it means that those of us who aren't feeling too panicked or too strapped for cash to drive anywhere are paying far less at the pump.

But it's not an unalloyed good thing, I assure you. Because aside from the first order reaction of, "Yay, I can fill my Prius up for less than $40!", the effects, and causes, of oil's decline are something to worry about.

First, effect. You see, many of the OPEC countries--and I'll grant you at the outset that if it weren't for the way the world economy is all interwingled, we might not care so much--many of the OPEC countries depend upon oil selling at or above a particular price in order to balance their budgets. Saudi Arabia, for example, needs oil above $55/barrel; Iran needs $90/barrel and is therefor already hurting. It's currently in the mid-60s, and despite the cut in production announced yesterday, still falling.

Now, cause. Perhaps more important (and more deserving of sympathy) than what the drop in oil prices means for the producing countries, is what it says about the consuming countries, which is that their economies are all, universally, so far down the shitter the world market is suddenly drowning in surplus oil.

From a summer spent facing the reality (and it is a reality, folks) of Peak Oil, we're now facing a winter of severe discontent in which people aren't buying much gasoline, not because it's too expensive, but because they're terrified of spending money...or no longer have any to spend!


Lastly, because we're so close to the election, I can't resist a bit of politics as well.

Y'all know that hoping for Mr Obama to pull off not just a victory, but a significant, unassailable victory; one that will be immune to electoral shenanigans like the one that Mr Gore suffered. I don't want a victory that hangs on the chads of few thousand provisional ballots. I want to see a mandate.

But we all have to be prepared right now for one absolutely guaranteed true thing: on 5 November, we will wake up to a financial mess as ugly as it was the day before. On 21 January 2009, when Mr Obama is, I hope, firmly ensconced in office, the world will still very likely be in turmoil. The mere fact of Obama's election and inauguration will not magically make everything better overnight. It took, depending on how you want to look at it, anywhere from 8 to 30 years for this current disaster to overtake us. Today's state of affairs is not merely the work of the monkey currently masquerading as President, but of his three predecessors, including, let's all remember, Democrat Bil Clinton, all of whom followed fiscal policies that contributed to the mess.

It will take a long time to repair the damage. While I don't want to say, "never", it's very unlikely that we'll see a spontaneous miracle happen that fixes all the problems and returns us instantaneously to prosperity.

What we can hope for, what I do hope for, is clear-headed thinking to examine and disentangle the knotty skeins of the problem, and provide confident leadership as we move forward. We need steady hands at the rudder. I believe, I hope, Mr Obama offers that, and equally to the point, I have not seen any sign that Mr McCain does.

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