Commentary

Goodbye Monday, hello recession road to recovery

The human emotions fear and despair trashed the stock market today. Two economic reports released today convinced Wall Street that a recession is on the horizon according to the AP–though it is inconceivable that this fear wasn’t present before the reports came out. The Dow Jones lost 733 points (7.9%), the most ever since losing 777… just a few days ago. The Nasdaq lost 8.5% and the S&P 500 took the biggest hit losing 9%. Coupled with yesterday’s losses, Monday’s huge gain has all but been wiped out. The first drop in the morning came after the Commerce Department released a report today stating that retail sales dropped 1.2% in September, nearly double the expected loss, clear evidence that consumer confidence is anything but confident. Consumer spending accounts for over 2/3rds of economic activity in the U.S. Everyone is saving, as long as their banks aren’t collapsing. The market stabilized in the late morning and had a brief moment when it looked like it would start a significant gain, but the released of a Beige Book report by the Fed, an assessment of business conditions, found that the credit crisis had officially slowed down the economy. Its not that we didn’t know that was coming, but seeing it in writing scared investors into a second quick drop after lunch. The credit market freeze is causing significant economic stoppage and recesses all over the nation, choking off growth for most of the economy. We are seeing now that the EESA bailout from the White House and Congress doesn’t really address the problem. Even if it succeeds in saving financial institutions from their bad investments, it doesn’t get the crap out of the economy’s cogs. There is a confidence problem. There is a credit problem. And there is a philosophy problem. The more the government does to try and solve the problem the more it is expected that they are responsible to fix the situation. This philosophy is killing innovation in ways we can’t see, it is killing confidence in the system because the entity we are looking to save us isn’t succeeding. If we were looking at ourselves to solve the problem, letting the free market work out the kinks, there would be frantic efforts by all in our economy to get us moving in the right direction as opposed to people sitting around waiting for government money. Fed Chairman Ben Bernanke warning today that patching up the credit markets won’t provide an instantaneous jolt to the economy: “Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away,” he told the Economic Club of New York. There were people warning of this prior the bailout. Congress rushed to complete a bill thinking that the sooner they acted the sooner we’d be out of this mess (and the sooner they could go home to campaign for their jobs). But they are finding out as Reason and others warned, that speed wasn’t the answer, that the bailout money was going to take just as long if not longer to impact the economy as taxes. Not to mention it is worse in the long-run. It is typical in times of economic downturn to grasp for hope quickly, but we are better off finding the bottom and then pushing towards the surface than failing around frantically, drowning ourselves slowly. Wall Street will hit the bottom soon and begin to rise, it can only drop so far. The sell off yesterday was because investors didn’t know if we had hit the bottom and were on the way up or would drop again and just wanted SOME profit after losing so much. Today, reports indicating information we already knew scared people again–like getting jumped in a haunted house, you’re already scared that something will get you, but when it does get you it is still scary. A continued problem for the market is self driven losses. Fear of a drop is feeding a drop. In the past several days of losses we saw mutual funds selling in large volume in order to have capital to pay investors who were buying out of their stock. This is not the time to bailout, especially for mutual funds or index funds. The investment wisdom that you stay true to your financial plan long-term should still apply today, for the market will come back eventually. It is true though that those who were planning on retiring in the next month to 18 months won’t have as much as they planned on. We need to be calm and let the government’s actions take effect. As horrible as they are for the long-term and as horrifying as they are in the promotion of socialism, they will have some short-term positive effects. Still, when its all said and done, we won’t be able to avoid some recession and that shouldn’t necessarily be seen as a bad thing. Economists agree that the economy moves in cycles. Recessions clear the market of clutter and we’ll be all the better on the other side. If recession is the fastest road to recovery the nation should increase its pain tolerance and reject the Keynesian tinkering philosophies flooding Washington.