August 4th, 2011

Falling stocks, rising fear

Stocks are falling sharply today, and some of the cause is bad news from Europe. Many countries are having the same crises of benefits outstripping the financial resources to provide them, and populations grown accustomed to their perks and angry at the prospect of losing them. And the global economy is so intertwined that the bell tolls for us all.

It’s small comfort that the US is not alone in its travails—and, in fact, is by no means the closest to the brink. We all know about Greece’s troubles, and now Italy and Spain give special cause for concern. In the understatement of the week:

European Commission president Jose Manuel Barroso urged European Union officials to reassess the recent bailout funds, as “markets remain to be convinced that we are taking the appropriate steps to resolve the crisis.”

Yes indeed, “markets remain to be convinced.” And the “appropriate steps” are either too disputed or too painful for many to contemplate, or both.

The US has just been through a Congressional struggle over the debt ceiling that has left the markets “to be convinced” as well. Congress and the President took the easy way out and deferred the real decisions for manana and a committee. It’s a recipe for increasing anxiety and uncertainty—and those are not good things for markets.

But what would be a good thing for the market? To allow the debt to skyrocket, increase the spending, and postpone the day of reckoning? Even if that reassured the market temporarily in the short term (and I don’t think it would), it’s hard to dispute the fact that it is postponing the inevitable. Those who believe the deficit must be reined in would like to do it sooner rather than later, knowing that there will be pain in the short term. That’s called a “correction” by those who believe the temporary grief will forestall greater problems later.

Today’s stock market fall does not seem to be mainly about what has recently occurred in the US with respect to the deficit and the debt ceiling crisis. The consensus is that it primarily reflects events in Europe, as well as an expected dearth of good news in the US unemployment figures about to come out. But still, the debt ceiling crisis could hardly have reassured a single person, with its length and its wrangling and its ultimate “solution” that solves nothing except the immediate issue of raising the ceiling itself.

And then “fear itself” adds to the brew, as none other than FDR once said.

37 Responses to “Falling stocks, rising fear”

  1. PA Cat Says:

    The market is just celebrating Teh Won’s 57th birthday.

  2. George Pal Says:

    Debt ceiling raised $2.4 trillion from $14.3 trillion debt ceiling.

    Average increase in federal debt per quarter since middle of 2008 – $365 billion.

    6 quarters x $365 billion = $2.2 trillion.

    number of quarters ‘til next election: 5.

    Crisis averted! (politically speaking – eff the rest).

  3. DirtyJobsGuy Says:

    A more adult and competent administration would have had a continuing effort to address the European Meltdown on the US. Remember this started in Iceland and Ireland before rolling over to Greece and the others. The Europeans can’t handle this because it means giving up the Euro which no Eurocrat can admit.

    If in 2009 the bad mortgage situation had been allowed to be wrapped up quickly and the US had followed Canada’s lead on exploiting natural resources and reduced spending we would be in much better shape today.

  4. Barb the Evil Genius Says:

    What does “manana and a committee” mean, please?

  5. Occam's Beard Says:

    We have a broken leg. We can either a) keep taking painkillers, or b) bite the bullet, and have the leg set.

    The second option generates more intense pain for a brief period, but ultimately leads to full recovery. The former avoids a brief intense pain, but at the cost of an indefinitely long tolerable pain, and merely postpones recovery.

    Grownups choose option b). Those of deficient character choose option a), at least until events irresistably and inevitably force them to option b).

    One of my favorite sayings: the wise man does immediately what the fool does eventually.

  6. physicsguy Says:

    And yet, BHO continues to ignore reality, and seems to be determined to continue on the same path. Saying how he’s only “half done with his agenda”… that’s enough to send any stock market down! Complaining about how democracy is so tough and messy to deal with; I’m sure if we just let him do what he wants, then all be fine. Will the US, and the world survive what these people have wrought much longer?

    Neo: serious question, How dangerous is someone who seems so disconnected be?

  7. Barb the Evil Genius Says:

    Occam, first we have to convince a lot of people that we even have a broken leg.

  8. Scott Says:

    Pretty much in full panic territory now. Huge volume. Margin clerks are liquidating accounts. Nornally, I’d say we’re getting close to capitulation pukefest levels (which would be time to buy).

    But I think I’ll wait to see what happens over the weekend. Maybe Turnaround Tuesday?

  9. T Says:

    People seem to be missing the point in this scenario. The problem is not the debt, it is, first of all, the debt in relation to the GDP. If we had a burgeoning economy, say 2.5 times its current level, the debt would be less of an issue (compare a person making $50,000/yr with $50,000 in credit card debt to a person making $125,000/yr with $50,000 in credit card debt).

    The second problem is our congress critters. We are in this mess because congress insists on spending more than the govt takes in ($1.17 to every $1.00 of revenue). raising govt revenue doesn’t solve the problem because congress has historically adjusted its overspending upward to match.

    In fact, the Obama/Democrat spending binge might just be the best thing that’s ever happend to the U.S. Instead of creeping along by adding a “scant” $100 billion/yr to our debt, Obama went into overdrive and brought the crisis to a head now.

    Furthermore, that the crisis is also a European crisis evinces that this is not an isolated U.S. problem, but a fundamental problem with the very kind of Euro-socialism that Obama is trying to impose.

    The first step in solving any problem is identifying the problem, itself, and we are now in the process of doing just that. That is why we see such weeping and gnashing of progressive teeth in the media. They no longer have any ammunition in this fight and they are reduced to name-calling and ad hominem attacks.

    For a clearer look at the meaning behind this, see this recent article by Walter Russel Mead:

    http://blogs.the-american-interest.com/wrm/2011/08/02/the-progressive-crisis/

  10. Tesh Says:

    @Barb “manana” means “tomorrow” in Spanish. It’s just more “kicking the can” down the road, refusing to solve the problem now.

  11. Mr. Frank Says:

    The MSM will continue to cover for Obama, which makes it hard for the public to see the problem. For quite awhile they have been bashing the Tea Party who have raised the alarm about spending and debt. They want to silence the messenger.

    A 500 point drop in the Dow is an attention getter. Tomorrow’s unemployment report is going to be very important.

  12. geran Says:

    Europe caused this? The consensus says so?

    I guess they are finally getting tired of blaming Bush.

  13. T Says:

    Mr. Frank,

    You are correct, the media will continue to cover for Obama but it will have less and less positive effect.

    Now that they’ve moved on from “Tea Partiers are racists” to “Tea Partiers are terrorists” their facade has some huge cracks in it. “Terrorists” will not work because they are now opposing their own narrative, not their oppositions’ narrative.

    After the Gabby Giffords shooting we saw the leftist media have a conniption over violent rhetoric. Now they’ve forgotten their own rhetoric and are opining about tea party terrorists to the same viewers they, themselves, lectured several months ago about violent rhetoric. Remember (!!violent rhetoric alert!!) when your enemy is committing suicide, don’t interfere.

  14. Occam's Beard Says:

    Occam, first we have to convince a lot of people that we even have a broken leg.

    Yes. But Drs. Moody, Standard, and Poor (appropriate) all concur in their diagnoses: “Yep, that bad boy’s broken. Big time.”

    The problem is not the debt, it is, first of all, the debt in relation to the GDP.

    Absolutely right. It’s debt in relation to ability to pay. Trying to explain this to liberals, I invoke the personal analogy: if I had $100 K in credit card debt I’d be suicidal (and the lender would have long since cut me off). If Bill Gates had the same debt, no biggie.

    The debt/GDP ratio is why the debt ceiling was purely symptomatic of the problem, not the problem itself, and messing with the debt ceiling was at best temporarily palliative. We’re in for a credit downgrade regardless of the debt ceiling, simply because our ability (and perhaps willingness) to pay in uninflated dollars now concerns lenders.

    In this connection, how many people understand that we’ve been buying our own debt? (Because no one else will buy our Treasuries at the offered return, and having to offer sky-high interest rates sends a message even the dullest liberal could decipher.) How does that work? We promise to pay ourselves?? We put an IOU in our wallets?? It’s a farce.

  15. Don Carlos Says:

    I suspect the fear, or, since it’s global, FEAR, is that there does not exist a fix. We are all caught between (A) incrementally advanced (by central banks) inflation, yielding eventual hyperinflation, and (B) progressive deflation, yielding eventual cascading debt defaults and an eventual enormous Depression. We keep looking for an easier, softer way between these two, but does it exist?

    Today’s huge ‘correction’ is a bet on deflation by the sellers, and, in the markets, never forget that every seller has a buyer. The buyers are betting against the sellers. Has either side found an easier, softer way? No.

    I lost about 1.5 or 2% today, not 4 or 5%, because I’m straddling the financial fence and don’t yet know which way to bet. The Hayekers will likely bet on deflation as nature taking its course, but the Keynesians running the central banks have a great deal of force, and hold the inflationary reins.

    We are entering the unvisited land of negative interest rates, which I take as a deflationary signal: BNY Mellon announced it will charge- CHARGE ! – cash accounts >$50 mill for parking money with them. My muni money market fund yields 0.01% interest!

  16. J.J. formerly Jimmy J. Says:

    I sent the following e-mail to Obama yesterday. A bit like peeing into the wind, but somewhat satisfying – speaking truth to power and all that.

    “Dear Mr. President,
    We have had a huge financial shock caused by the failure of the mortgage backed securities that were sold as being of higher quality than they were. To avoid a melt down, the TARP was necessary to restore some semblance of confidence in our banks and financial system. It worked. However, the stimulus bill was a total failure because it stimulated government jobs not private sector jobs. The auto bailout of GM and Chrysler might have been a good idea if you hadn’t stiffed the investors in favor of the unions. That created a lack of confidence in your philosophy. Your constant advocacy of raising taxes on those (incomes $200,000 and up) who are the heart of our small businesses gave little indication to small business that you were their friend. The passage of the health care bill has made things worse because businesses can see that, as a result of the bill, their costs are going to rise. This has destroyed a lot of confidence. Confidence in not being taxed and heavily regulated by government is the mother’s milk of business. Your anti-business rhetoric and actions have sucked the confidence and the life out of business. Many are going “GALT.” That is, they are hunkering down and not hiring or expanding because of the anti-business climate.

    There are many things you could do to change all that and get the job increases that you would like to see. But it will require you to take off your redistribution glasses and see that your problems can only be solved by promoting business growth, not stifling it.

    A few suggestions:
    1. Quit calling for more taxes on the wealthy.
    2. Open up Alaska, all of the Gulf, and all of our offshore areas to oil exploration and drilling. The USA floats on a sea of secure, reasonably priced energy. You can make it happen.
    3. Call for expedited permitting for nuclear power plants and ask utilities to build ten new plants every year for the next ten years. Think of the jobs and capital flows that would create.
    4. Call off the EPA and its war on CO2. The only intelligent strategy for climate change is adaptation, not mitigation. Read Bjorn Lomborg’s book, “COOL IT.” He will explain it to you.
    5. Give EVERYONE a waiver on the health care bill.
    6. Want to stimulate the housing sector? Provide an eight year, 5% capital gains rate and expedited depreciation for all investors who buy foreclosed homes and turn them into rentals. No government money needed – just a chance to make a profit for those willing to take the risks.
    There are many other things that you could do, just ask any free market businessman.”

    Will he take my suggestions or do anything that is vaguely pro business? The answer is, of course, “NO!!” It’s going to be a rough ride.

  17. Scott Says:

    Just saw this tweet from Larry Kudlow at zerohedge.com. Accoding to him, starting to get bank runs in Italy, freezing the interbank funding market.

    http://twitter.com/#!/larry_kudlow/status/99211544814026752

  18. Occam's Beard Says:

    J.J., thanks for posting your cri de coeur. Also, please say “hello” to the IRS auditor for us. /g

  19. M J R Says:

    Don Carlos Says:

    “Today’s huge ‘correction’ is a bet on deflation by the sellers, . . .”.

    Do you really mean deflation (falling prices), or possibly disinflation (level prices, or prices rising but not as much as before — a drop in the rate of increase)?

    [For math geeks out there, negative first derivative, or negative second derivative?]

  20. Don Carlos Says:

    Deflation v. disinflation has yet to be determined. I do suggest bank(s) charging for parking money, i.e. negative interest rates, is deflationary.

  21. rickl Says:

    Broken leg, hell. As Karl Denninger of the Market Ticker posted this morning (before the 500 point drop), it’s a crack addiction.

    This is one of his best-ever Tickers, and is a letter-perfect analogy to our current economic situation. It’s a must-read.

  22. Curtis Says:

    Obama’s wife: Crackanna Sixpack.

  23. Curtis Says:

    I just read about how the University of Tennessee had to pull some “disappointment” mints featuring Obama’s face on the cover off their shelves. Hey, if the universities are doing it, it’s over!

    Question is, have we fallen too far into the abyss to stop?

  24. Wandriaan Says:

    I just listened to Ron Paul on the Savage-show. To me Ron Paul makes the most sense about all of this. He said that the markets crashed because of the debt deal, but that the obama-media will not admit this. The markets fear this (inflationary) overspending will lead to new bubbles that will burst, because the market cannot do the correcting, i.e. correcting bad economic decisions.
    He also said that after the housing bubble in 2008 and this stockmarket bubble bursting now, it is only a matter of time before the big bubble will burst: the dollar. Using the moneyprint to solve debtproblems will inevitably lead to loss of confidence in the dollar. Hyperinflation, he said, will be the result.
    I fear he is right , as he was so often in the past.
    De Mises and the Austrian School of economics have common sense and history on their side in their explanation of the business cycle. Their arguments against Keynesean economic policy seem very solid to me. But then, for politicians following Keynes is so much more attractive…

  25. rickl Says:

    Like I said a couple of threads back, politicians like Keynes because his theories give more power to the state over individual citizens.

  26. J.J. formerly Jimmy J. Says:

    Curtis asks, ” Question is, have we fallen too far into the abyss to stop?”

    The answer is – no one really knows.

    Now, here’s something to think about. Yes, the U.S. has got a terrible debt problem. But so do most other advanced economies. The dollar actually strengthened today. Why? Because there is no other currency at this time that’s safer. I know that is amazing. It’s like asking someone who says that the U.S. is doomed and you have to get out to save yourself. Okay, where are you going to go? Anybody know? Better to stand here and fight for the changes that will get the economy moving again.

    I just finished reading “THE ASCENT OF MONEY” by Niall Ferguson. It adds a lot of background to what is happening now. This financial panic and failure has happened many times in the past. Just different countries and different economic circumstances but countries go bankrupt and recover. Of course some don’t recover because they learn nothing from their financial demise. It’s the nature of humans. We always overdo a good thing. And like last night’s bender we have to sober up, regroup and get on with life. Unfortunately, some never quite regroup. (Spain, the Netherlands, Argentina, etc.) We can’t be defeatist if we’re going to pick ourselves up and ste thinmgs right.

    What country has the best business infrastructure, capable workforce, abundant resources, private property laws backed by courts, and more? The good old USA, that’s who. We can recover from this, but it will require the government getting out of the way. The business of America is business. Right now we are operating way below our capacity. Steps as I pointed out in my letter to Obama could set things right. The way to increase revenue and reduce the debt is to get our economy to perform up to capacity while holding spending level. It won’t, can’t happen overnight, but it also won’t happen if we don’t think it can and keep having defeatist thoughts.

  27. Curtis Says:

    So agree.

  28. Barb the Evil Genius Says:

    Actually, Tesh, mañana means tomorrow in Spanish.

  29. Barb the Evil Genius Says:

    And even at that, I still didn’t quite get the phrase “mañana and a committee.” But no matter.

  30. jms Says:

    The way I see it, this was the last chance for the United States to save their AAA bond rating, and Congress and the President blew it. The markets wanted a real, if token deficit reduction starting now. Congress upped the debt limit and Obama responded with a brand new massive deficit blowout of over $300 billion for the July-September quarter.

    If the bond rating agencies were waiting to find out what the United States was going to do, they have no reason to wait any longer. Now they know the intentions of the Obama administration, and what they are doing is the worst case scenario.

    I would not be surprise to see the ratings agencies downgrade the United States debt after the close of markets tomorrow. I think that a lot of people are getting the same feeling — like our last chance is now gone. And I think that that’s a big part of today’s market crash. I expect the crash to continue. This debt bill was a disaster.

  31. Obama’s Legacy Says:

    [...] Neo-Neocon: It’s small comfort that the US is not alone in its travails—and, in fact, is by no means the closest to the brink. We all know about Greece’s troubles, and now Italy and Spain give special cause for concern. In the understatement of the week: European Commission president Jose Manuel Barroso urged European Union officials to reassess the recent bailout funds, as “markets remain to be convinced that we are taking the appropriate steps to resolve the crisis.” [...]

  32. SteveH Says:

    “”Curtis asks, ” Question is, have we fallen too far into the abyss to stop?””

    Well there’s financial abyss which is not to be confused with a quality and interesting life neccessarily slipping into an abyss. I grew up dirt poor and recall it as some rather good times. And even the Great Depression is often refered to by those that went through it as ” the good ole days”.

    There may well be a cliff ahead. But it’s important to know we can sew our own parachutes depending in large part on how we choose to percieve and respond to the events.

  33. J.J. formerly Jimmy J. Says:

    OB said, “J.J., thanks for posting your cri de coeur. Also, please say “hello” to the IRS auditor for us.”

    Ya think?

  34. texexec Says:

    The market is tanking as I write this at 10:57am, Friday…

    (down 261 and dropping)

    We are now paying the piper after decades of economic silliness and living on make believe money.

  35. Artfldgr Says:

    call me silly…

    but if you look at it the way i see it

    1,000,000 raised to the second power times 40 or so…. is a problem..

    Look.. in the game of hot potato, do you want your money/loans sitting in a 1933 Germany? how about a 1916 Russia?

    The idea that something that hates something would be the best keeper is how dumb the population is… and the simplest non partisan way i can put it

    Everyone around the world, but us knows that America is not what we believe it to be, and also knows that when we cant get to what we believe, America becomes an address…

    As an aside tangent, anyone other than i realize that America is about to become defenseless?

    you cant defend yourself if you cant borrow to cover things and have lines or means of getting those things (or making them).

    and giving up is a signature that congress doesn’t have to be involved in… in case i forget or missed it.. since giving up was inconceivable to the people who wrote the constitution, there are no provisions for preventing the president from giving up to a foreign power… is there?

    Someone just has to ask the president…
    no?

    the taking possession thing might be hard, but if we were completely at the economic mercy.. well that might just be the price to pay… or what?

  36. Artfldgr Says:

    Russia uses dirty tricks despite U.S. ‘reset’
    Intelligence agents tell of intimidation, smears of American officials, diplomats

    http://www.washingtontimes.com/news/2011/aug/4/russia-uses-dirty-tricks-despite-us-reset/

  37. Artfldgr Says:

    Two government officials tell ABC News that the federal government is expecting and preparing for bond rating agency Standard & Poor’s to downgrade the rating of US debt from its current AAA value.

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Previously a lifelong Democrat, born in New York and living in New England, surrounded by liberals on all sides, I've found myself slowly but surely leaving the fold and becoming that dread thing: a neocon.
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