The Economy as a Red Balloon
by Efin Advisor | October 17, 2008
In the past week, the Dow Jones Industrial Average, one of the barometric indicators of upward or downward pressure in the American stock market, has been rising and falling like a red balloon caught in a windstorm. Many feel as tossed and tumbled as that helpless balloon, asking themselves “What’s next?” and “When will the wind change?”
According to the Chairman of the Federal Reserve, Ben Bernanke, the key is for that metaphorical balloon to settle back down to earth. “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.” This is promising news for mid-to-long-term investors who have held on the wind tunnel that is the US economy the past two weeks, and suggests that stock market investors might be better off keeping that long term view.
At the very least, bank depositors can rest assured about their savings in FDIC protected accounts The Treasury has used much of the first 250 billion dollars, endowed to it by the government bailout, to make direct investments n banks to provide necessary liquidity and reinforce financial stability.
Given the likely recovery of the economy, and the government’s historic investment in banks, why is the market fluctuating like a balloon? There is a cycle to the way the stock market tends to behave, although even that can be less than predictable. The conventional wisdom, is that people who are fearful of the economy sell their stocks. As stock price drop, the price attracts a number of new investors, which causes, in turn, a n upturn. As the world turns, and news headlines worsen about the economy, stock prices can sink again. It is a cycle that is often described as more psychological than anything else.
Do you believe that “confidence” in the economy is the single biggest issue confronting the turnaround? Are you of a mind to conserve or spend? Is our national economic drinking glass half-empty or half-full? Comments are open.
Confidence is a huge issue, but there are some constraints on pure confidence. For example, if people have a lot of confidence in the economy, but do not have the money to buy the stocks that they are buying (i.e. buying on margin) then the bubble will eventually burst, even if people think the economy will keep going strong. This is part of the cause of the Great Depression and the current market troubles.
Confidence is key though. In order to get ourselves out of this economic snafu, then the American people have to be able to confidently invest in the economy. Otherwise, people just save and do not put more money into our economic recovery
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I think the smart investors are hanging onto their stocks and letting the rest of the world lose sleep over the economy\’s fluctuations. Any good investor has got money tied up in both short- and long-term investments, and the long-term stocks will be fine in a few years or decades when an investor is ready to pull out to secure his nest egg. As for short-term stocks, only an idiot would bail out now because he\’d be losing so much of what he put in. If you\’re looking at a big-time company on the Dow or S&P, unless there\’s a legitimate concern that it\’s going to go into bankruptcy, it\’s almost guaranteed that it will bounce back at some point. Instead of limping away with your tail between your legs, just wait a little longer to get your money back and pull out when the stock gets back to a reasonable level. It\’s really not that hard if you\’ve invested wisely and kept a reasonable portion of your net worth out of the market so you can still live comfortably on what you have.
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I think the fluctuations are due more than anything to people not being used to a U.S. market this volatile. In 1990s Turkey, something like this would be considered a drop in the bucket since their market crashed every other week. We’re so used to a stable economy that a few people sign off on bad mortgages and the whole stock market goes down in flames and financial experts start talking about doomsday. I think it’s a total confidence issue.
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I totally disagree that this is a confidence issue. Banks are going out of business, people can’t pay off their mortgages, companies are losing billions… does this sound like fabricated psychological babble to you? Make no mistake, economics is a very material discipline, and we’re in this mess because of economic realities, plain and simple. And economic realities are the only thing that will get us out… thus, the bailout coupled with hard honesty from Bush is a great first step to bringing us out of recession, not a bunch of coddling and telling investors “Everything’s going to be alright” to improve their “confidence.”
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I totally disagree that this is a confidence issue. Banks are going out of business, people can’t pay off their mortgages, companies are losing billions… does this sound like fabricated psychological babble to you? Make no mistake, economics is a very material discipline, and we’re in this mess because of economic realities, plain and simple. And economic realities are the only thing that will get us out… thus, the bailout coupled with hard honesty from Bush is a great first step to bringing us out of recession, not a bunch of coddling and telling investors “Everything’s going to be alright” to improve their “confidence.”
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As a small business owner, with the possibility of my retirement tied up in the market, I have been faced with some big decisions lately. I would like to think that this crisis can be solved by an increase in business confidence alone, but I am not hopeful that this will happen (which may be the whole problem). I have refrained from pulling what is left of my money out of the market not only because I do not want to make the problem worse, but also because I need the market to turn around, and I need to have my money in it when it does, so that I can make back some of what I lost.
I think it is difficult to say whether our economic glass is half full or half empty, but I lean towards empty (maybe ¾ empty) but not because of our recent economic crisis alone, although certainly the failures of several banks are not good. I think that the real indicators of our future include our issues with cheap Chinese products, and our dependance on foreign oil. In my mind these factors keep us from dictating our own terms on the world stage, and facilitate the devaluation of our currency.
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I think that confidence is the biggest issue facing our economy today. The problems with banks have caused problems on the market, but the key to a swift rebound is all about confidence. In my mind this is what makes our system so fragile. Instead of the values of our shares being based in anything concrete, the value is based in how people think about the market. I am overall hopeful for the market to rebound, especially because the market has been all over the place in the last few weeks. Not that it is particularly good, but I think that it has shown what the market is capable of. Since the banking collapse the market has had some of its most impressive days, which leads me to believe that the potential exists for things to eventually get better.
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I disagree with Bruce. I do not believe that just because we think everything will be alright, that it will get better. It seems to me that this kind of thinking is probably what got us to this point in the first place. We need concrete economic policies and concrete regulation to ensure that we do not put too much strain on the market. Individual companies can only be relied upon to make money for themselves, because of the way that our economy is structured. While I am not usually one to advocate for government intervention- I think that it is important for us to have a solid set of economic regulations so that we avoid situations like this. I think that a lack of foresight is to blame for our current crisis more than a lack of confidence. Quite honestly a more confident market is not going to magically cause a tree made of money to spring forth from the ground, and pay our mortgages.
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What does Bernake know? He’s not on the ground, feeling the suffering that we are all experiencing. Economists sit there in an ivory tower, looking down upon us saying what will come, but economics is not a science; it is flawed and requires people act like they think they will. Economics often fails. Economics says markets should solve, but they never do. I don’t trust what they say.
Them saying it doesn’t even help. If confidence mattered, and all these people were saying we are fine, then we would be, but we’re not. I’m going to save my money in a mattress, and protect it with my life and hopefully withstand this crisis.
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Samantha, economists may sit in ivory towers but the things they say make sense. People do act based on self-interest and very often the market does solve (if it didn’t, we wouldn’t even be a country right now). It’s very hard to read the market, yes, but we can still do our best and our experts are steering us in the right direction. You’re welcome to take your money out of banks if you want; when there’s a fire in your bedroom or you get robbed, the FDIC and insurance companies won’t have to cover a dime.
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Adam, economists don’t know what they’re talking about. If they did, we’d never be in economic crises because the president could just do whatever his economic advisors say and always keep things running smoothly. Economists are just educated guessers who think they know about human nature and politics when really all they know is theories and hypotheses about how the world works. I do not trust economists, especially after so many of them said the economy would be fine befire we plunged into this recession.
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The real problem is oil prices. I know oil prices are dropping, but they are still obscenely high for mid-fall. The more oil costs, the harder it is to pay for the energy required to run offices, run manufacturing plants, drive to work, ship products, and everything else imaginable. If we can get out of Iraq, hopefully we can see the middle east cooperate with us more, or maybe we should drill for oil. Oil is the real fundamental part of our economy, and that’s what we should concentrate on fixing.
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Lauren- oil prices dropping is a fantastic market correction. Oil prices are obscenely low compared with where they were a few months ago or even several years ago, and our economy has already adjusted to the comparatively high prices. Gas will be going down, heating oil will be going down, and people will have more disposable income to spend on other things. Lower oil prices will help our economy to be further stimulated. To say oil prices are too high is pretty absurd considering the staggering price drop we’ve seen over the past few months.
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