The market is not listening, "wise" ones

A recent newspaper article post the foreclosure combating package doled out by Pres Obama on 19th Feb stated that, 'Stocks ended the day flat after moves to both extremes intraday. Early economic data weighed on the market but as Pres. Obama outlines his plans to help home owners, markets recover somewhat. The afternoon proved too long for any sustained rally as the FOMC spoke of a protracted slumber in the economy.

Afternoon too long? WTF?

Let's take a look a the kind of measures spewed:

1. Stimulus Packages
2. Nationalisation options
3. Doctored press release
4. Diabetic optimism
5. Bailout for crucial sectors (non which sector not crucial... that i would like to know)
6. Interest rate dips
7. Marketing ('Our economic advisory team is working on computing the blah blah type statement')

To my understanding this crisis has really deep roots. Some reports actually take it back to the lackadaisical action taken by the US during the Asian crisis. Many more allocate it to Greenspan's policies. However as far as the average investor goes, he first smelt fear with the news of Bear Stearns and a few of its hedge funds going belly up.

Ever notice how the impact of news changes with altering business environment?

Pres. Obama recently announced his plan to protect 9 million American households in addition to the banks from foreclosures. The package being rendered this time: $75 billion.

The news however had almost NO impact on the markets. 'Factored in' seems to be convenient veil to hide behind.

The markets were supposed to be an indicator of the future course of the economy. This is sacrosanct with the popular belief that share prices are an indicator of prospective earning capacity of the particular enterprise. As mentioned earlier a variety of measures have been announced... how is it that every measure seems to push the market lower?


This is how the chronology pans out... trouble rumbles, we get the shivers, fells the jitters and the government steps in. The government that for long has been the torchbearer of the capitalist school of thought, summons its smartest (apart from the usual parliamentary jocks) economists to device plans. The plan suggested - Plug the hole in the dam, and things will be fine.

The smart guys did just that. Every progressive crevice that developed was filled with the putty of federal dough. Neanderthal origins lead the world to ape this very approach. Quite a patchwork we have out there.

Now the trouble is... where these reforms had the intention of averting further crisis, they seemed to have had an opposite impact. The market interpreted each rescue message of the government as a sign of how bad the scenario was and sold heavily, dragging markets and hopes down. As the stimuli flew think and fast, the market painted the ticker red. In perfect symphony with the bailouts handed, the markets dove deeper.

So, in effect while the government was plugging the hole, the market was increasing the water pressure thus expanding the crevice. Thus a finite volume dam was turned into a bottomless abyss.

So what came before and what's causing what? Additional bailouts harboring more fear, uncertainty and the ensuing cacophony or widespread pessimism and panic demanding the corrective influence of bailouts?

Something similar is happening to gold recently... but more on that in a different post.

The trouble is the downward spiral of debt that countries worldwide are getting caught in. What got us into this mess in the first place might well prove to be our bane again. The trouble with debt is its staggering impact with the advent of securatisation.

The only parallel with the current scenario seems to be the depression of the 30's. It was then that Irving Fisher had very prophetically stated, "Over investment and over speculation are often important; but they would have far less serious results were they not conducted with borrowed money. The very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate…the more debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. "