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February 27, 2009

FINDING THE BOTTOM

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FINDING THE BOTTOM

 

The DOW finished the month of February at 7062.93, a decline of 11.72% for the month and 50% below the record high in 2007.

 

Is this the bottom? 

 

A number of pundits have predicted a market “floor” at much higher levels.  For example, last year Suze Orman famously and confidently predicted a floor at 8,200.  I understand that some of her friends also predicted the defeat of the traditional marriage initiative in California. 

 

So much for the audacity of hope. 

 

A floor is an aggregate market price, like that of the DOW index, at which a critical mass of investors will start a buying trend that has the effect of stabilizing and supporting a price level that becomes an effective lower limit -- a floor.  By definition, market floors are psychological barriers.

 

But a bottom is a different animal altogether.  This market is terrified of the bottom.

 

Be reassured:  Unless aliens invade, the oceans overflow or there is civil war, the share prices of ongoing businesses will maintain a reasonable relationship to the estimated sales value of the businesses themselves.  In the aggregate, this defines a true bottom.  Yes, overheated suburban real estate in areas where there are no employed buyers and the “vapor ware” startups of the internet bubble days may have next to zero value. But that is never true of the core economy.  Oil, gasoline, wheat, rice, gold, aluminum and hardwood are never free.  Right now, the entire business asset valuation process is complicated by debt loads.  A business deep in debt may actually have a negative value.

 

The current economy is undergoing a sort of mass hysteria because a critical mass of investors are frightened to death that there is no bottom.  The reason for this hysteria is that a significant number of financial institutions (and their dependent businesses) are much deeper in debt than they dare disclose.  This is like a game of strip poker in which a number of the high rolling players are hiding the fact that they are suffering from acute leprosy.  Damned if they are going to undress in public.  But they want to keep playing the game as long as possible hoping (like any gambling-addict) that their luck will change.

 

And now we see the scope of the problem.  This economy will only begin an authentic recovery if and when an authentic bottom is discovered.  This will require a Darwinian sorting period during which ruthless market forces reveal where the cancer is located.  First locate the tumors. Then do the surgery...then the chemo...then start the “wellness care” for the patient.  Anything short of that diagnosis and treatment regimen amounts to the audacity of delusion.

 

Pray for realism and courage.  We will get through this....

 

JBG

 

 

 

 

February 25, 2009

Collapse of the Optional Economy

Welcome to the Policy Think Site: http://www.jaygaskill.com    
As Posted On
→The Out-Lawyer’s Blog: http://www.jaygaskill.com/blog1   
→The Human Conspiracy Blog: http://www.jaygaskill.com/blog3 
Also check out the “OutLawyerGaskill” channel on YouTube at http://www.youtube.com/user/OutLawyerGaskill ...
All contents, unless otherwise indicated are --
Copyright © 2003, 2004, 2005, 2006, 2007, 2008 & 2009 by Jay B. Gaskill
Permission to publish, distribute or print all or part of this article - except for personal use - is needed. Forwarded links welcomed.
Contact Jay B. Gaskill, attorney at law, via e mail at law@jaygaskill.com

 

Collapse of the Optional Economy

 

 

Every crisis repeats features of the last and introduces new elements that require new thinking.  Unfortunately, the great credit collapse of 2008 hasn’t yet sparked the kind of authentically new thinking we’ll need to get out of the current hole and stay out.

 

Think of the new president’s initial prescription, that the economy needs ‘shock treatment’.  Maybe he was thinking of the shock paddles in the ER or the barbaric electroshock-to-the-brain therapy for the clinically depressed. 

 

Either way, the prescription was like shooting adrenaline into a cancer patient, when surgery, chemo and a supervised recovery would have been more appropriate. 

 

I am a ground level, 'buckets and wheels' economist.  All economies have certain basic features, the core survival functions that feed all the rest.  Food, energy, shelter and the exchange and transportation infrastructure needed for food, energy and shelter are the essential elements of the buckets and wheels economy.  Everything else is optional. 

 

I could see the pending collapse just by watching cargo ships at a major American port.  Cars and cheap Chinese goods were coming in.  Scrap metal was going out.  How long can that go on?

 

In the Great Depression, food production was seriously impacted and fuel supplies were impaired.  In the current malaise, large, over-priced homes are going vacant in favor of apartments; second homes are going on the block; purchases of flat screen television systems, upgraded computers and restaurant outings are being deferred. 

 

The overheated credit system grew to a gigantic scale because it was 'necessary' to support a vast optional economy that depended on a relentless stream of advertising to generate demand for more optional consumption.  Because the credit system required the fig-leaf cover of underlying loan-securing assets, an artificial boom in American real property became the new 'gold standard'.  But the whole hugely leveraged game rested on a fragile daisy-chain system of incomes that eventually began to fall in on itself. 

 

Here’s the dirty little secret.  Bernard Madoff’s multi-billion dollar Ponzi scheme is the dominant metaphor for the entire optional economy.  Money manipulation does not create real wealth.

 

JBG


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