[Double-click graphic for larger view]As I looked at the highlights of last year's presidential campaign and the precipitous fall of the Dow Jones Industrials (DJI) amid the current economic collapse led by the popping of the housing bubble, I began to wonder what contribution racism -and in particular the unjustified fear of racism- might have had.
My conclusion is that racism and what turned out to be unjustified fear of racism had a substantial effect on the market decline, along with what turned out to be an unjustifiably bloated valuation of the market and of real estate.
The good news is that the market will probably recover nearly as fast as it dropped. I predict we will see it around 9,000 or more by year end and over 10,000 in a few years. The bad news is that the high levels of the last decades, and in particular the peak of 14,000 in 2007, were unjustifiably optimistic and will not be seen again for many years.
The good news is that the market will probably recover nearly as fast as it dropped. I predict we will see it around 9,000 or more by year end and over 10,000 in a few years. The bad news is that the high levels of the last decades, and in particular the peak of 14,000 in 2007, were unjustifiably optimistic and will not be seen again for many years.
LET'S LOOK AT THE GRAPHICAL RECORD
The base graph above shows the actual DJI from 1930 to the present (jagged blue line). It also shows my estimate of the "true" value of the corporations represented in the DJI (green dotted line), based upon the idea that the stock market, an imperfect instrument, seeks to find the "true value"as it oscillates above and below, overshooting and undershooting on its merry way. It is nearly impossible to project the future course of the "true" value, but, given the actuals from 1930 to the present it is possible to draw a smooth curve, called a "regression line", that approximates the "true" value.
As you can see, the period from about 1995 to last year saw the market 2000 to 4000 points above the "true" value. I believe it is now around 2000 to 3000 points below the "true" value. My projections for the future (the fan of red dashed lines) indicates the market will soon go up sharply, most probably matching the "true" value by 2012. Optimistically, it could overshoot the "true" value by 2012 or 2013 (upper dashed red line). Pessimistically, it could undershoot the "true" value for decades (lower red dashed line). But, even my most pessimistic prediction shows the DJI on a steep incline for the coming few years.
WHY WAS THE MARKET OVERVALUED?
Government policies, starting in the 1990's, overstimulated the housing market. Fannie and Freddie, quasi-government organizations, assumed increasing responsibility for mortgages. This created the government-backed "moral hazard" that allowed -even encouraged- local banks to hand out mortgages to marginal borrowers, knowing they could offload these mortgages to Fannie and Freddie. As these mortgages were sliced and diced and "securitized", the SEC failed to properly regulate the securities and companies like AIG that insured them.
Everybody believed (or pretended to believe) that real estate could not go down. Well, maybe it could go down in some local geographic area, but it could never go down all over the country at the same time. Thus, "securitizing", by creating "diversity", was a way to insure stability and growth of "affordable housing".
The constituents of both political parties loved these policies. Republican developers and housing material corporations saw their businesses boom. Democratic workers got good paying jobs in the factories and building trades and the lower middle-class got affordable housing. Home ownership was preferable to renting because it gave people a stake in the community and a path to the middle-class. OK so far, but then the banks started giving loans to people who could never pay them off -even in good times- and some lenders even helped borrowers phony up their applications to get them approved. ("Countrywide is on your side!")
WHAT ROLE DID FEAR OF RACISM HAVE IN THE MARKET CRASH?
Investors hate uncertainty. The inset graph above shows the actual DJI track from April 2008 through March 2009. (It is to the same vertical scale as the base chart for ease of comparison.) The DJI was around 13,000 when McCain became the presumptive nominee for the Republicans and a bit lower when Obama appeared to have a clear lead over Clinton in the Democratic race.
After McCain and Obama were nominated by their parties (end of August, beginning of September) the DJI was down to around 11,500. As it became clear that Obama was likely to win, the market dropped precipitously (777 points on September 29th), and by a month before the elections, with Obama 6 points ahead of McCain, it was in free fall, crossing below the 9,000 level.
From election day, with Obama's big win, to his taking office on Jan 20, 2009, the market tumbled down to around 8,000. Two months into his term it hit a low around 6,500.
I believe only a relatively small number of people (genuine racists) pulled their money out of the market or cut back on their workforce because they did not think a Black president could do a good job. On the other hand, I believe a much larger number pulled their money out because of their unjustified fear that the actions of the racists would cause the market to go down. That accellerated the fall.
OTHER REASONS FOR THE MARKET CRASH
As I mentioned above, the market was ripe for a "correction" down to 10,000 or so. There were fundamental problems in the housing market caused by government-backed "moral hazard" policies and lack of proper regulation.
There may have been some organized effort by some leftish-oriented members of the moneyed class to take advantage of these weaknesses and push the market down temporarily to guarantee an Obama victory. I have no proof of this allegation and only mention it in case further investigation shows that some hedge funds were manipulating the market in the September-October time frame last year.
Also, some rightish-oriented members of the moneyed class might have been worried that an Obama victory would bring about more "socialistic" policies that would hurt the economy and pulled their money out for that reason.
Finally, the major media, nearly all of which supported Obama, always like a crisis story. They jumped on the highlighted phrase when McCain said: "... Our economy is in crisis ... there's been tremendous turmoil in our financial markets and Wall Street ... people are frightened by these events. ... still the fundamentals of our economy are strong. But these are very, very difficult times. And I promise you, we will never put America in this position again. We will clean up Wall Street. We will reform government."
I believe the fundamentals -American workers and industry- are strong and will recover almost as fast as we went down. Markets tend to over-react in crisis -both on the way up and the way down- so, hold on to your hats for the ride up!
BOTTOM LINE
I believe President Obama is very smart and intellectually flexible and basically honest.
I hope he can overcome his work experience in an activist law firm, as a community organizer, and on the left in the Illinois legislature and the US Senate. His entire career has been based on pushing policies that take money from those who earned it and give it to those who (for whatever reason) did not. On the other hand, he has demonstrated that he, personally, is a very hard worker. At Harvard, the law firm, in Chicago communities, and the legislatures, he has demonstrated tremendous intellect and industry and work ethic.
I want President Obama to succeed because I want to see our country emerge from this economic crisis stronger and more "mean and lean" to compete better in the globalized marketplace. This "correction" in our economy was overdue but perhaps it has been overdone.
I see hope in the availability of more affordable housing (due to the foreclosures), the reduction in energy prices (due to the economic slowdown), the elimination of some unproductive factories and wasteful union work rules (due to bankruptcies and threats thereof) and people willing and anxious to work harder and smarter (due to the reduction in job availablity).
I do not want all of President Obama's stated policies to succeed. For example, I am worried that the printing of a few trillion (thousand-billion) "stimulus" dollars will inevitably lead to roaring inflation a couple years from now. Much of this money will go to politically-connected states and cities and companies and unions and will probably be wasted (think of Boston's "big dig" on steroids and spread over our entire Nation).
But, I remain optimistic.
My wife and I "hung on" during the stock market downturn and saw losses of about 50% in our stocks and 401K accounts, as well as a substantial drop in the value of our home. But, even counting these substantial declines, we are still above our cost basis in both stocks and our house, so all we have lost is some "paper profits". Let us all hope for a substantial recovery in the market this year and next.
Ira Glickstein
12 comments:
Ira a very interesting article. I can’t reply in detail because I have a very busy time coming up, however, could you address the following.
I don’t believe the stock market’s fall was due to racism. Rather it was due to worry that more socialistic policies would arise upon Obama’s election. It had nothing to do with his skin color. Realistically we all knew that the republicans had little chance of winning because of “Bush hatred” and dissatisfaction with the economic performance of the Republican Party while it was in office. If Hillary Clinton had won the result would have been the same although maybe less so, she being a more accomplished politician.
The stock market was also affected by the precipitous rise and fall in oil prices, the financial collapse of the banks, the collapse of major financial institutions, the lending freeze and the failure of the government to properly oversee and regulate financial matters.
The continued fall from December to today was a direct reflection of Obama’s comments and,a swift move toward the far left, in particular, quickly throwing money at an undefined but massive problem. Solutions were not articulated; just throw money at the problem and it will go away.
I have no idea how much race plays in the market, and I think it is impossible to find out. Simple polls do not reveal hidden prejudices.
I do have an L-mind idea about Ira's statement, “[Obama’s] entire career has been based on pushing policies that take money from those who earned it and give it to those who (for whatever reason) did not.”
That disparaging comment is not accurate. It not only shows ignorance of Obama’s work in Chicago and his pragmatic philosophy, but it reveals a typical conservative simplistic ideology.
Upper middle class C-minds have a hard time recognizing the good luck in their lives ― to them, everything they have looks like something they have earned. And as Ira says, “To those who (for whatever reason) did not” [have good luck] you owe nothing.
By contrast, liberals who are truly rich like Buffet, Gates, and Carlos Slim, understand bad luck and how it is costly to the entire society. Philanthropy money like tax money is essential for a stable society.
Anyone who thinks can see that much of their life they have not earned. Buffet calls himself "A member of the lucky sperm club" (on Charlie Rose). He says he happened to born in the right country, to the right parents, at precisely the right moment.
Buffet agrees that unfortunately many conservatives truly believe they owe their wealth only to their brains and hard work. Like Vanderbilt, when asked to aid people standing on a food line, recalled his own impoverished beginning and replied: "Let them do what I have done."
I also think JohnS is mistaken if he thinks, “Solutions were not articulated; just throw money at the problem and it will go away.” The Recovery and Reinvestment Act is the product of many competent experts across the political spectrum. This is not a Mickey Mouse problem, and conservatives who predict its failure based only on their ideology are not helping.
Howard, when I said (parenthetically) "for whatever reason" I was, of course including "luck".
I do not consider it disparaging, but a simple matter of fact that “[Obama’s] entire career has been based on pushing policies that take money from those who earned it and give it to those who (for whatever reason) did not.”
Instead of taking a position at a prestigious commercial law firm where he could have earned big bucks, he worked at an activist law firm (where he met his wife-to-be Michelle) and as a community organizer because he wanted to help the poor and downtrodden who needed help because they could not (for whatever reason) work to earn their own upkeep. Where does such money come from? From taxes and donations paid by people who (for whatever reason) earned it by working for it (or inheriting it from ancestors who did).
Obama's career in the Illinois legislature and the US Senate on the left end of the Democratic Party was, quite naturally, laden with support for redistributionist laws.
The above is a fact and I cannot see how you consider it denigrating (especially since you agree with the need for philanthropy and government welfare programs).
Yes, you and I and Barack Obama are members of the "lucky sperm club". You had the additional luck of being born into an academically accomplished family who cultured you at home and sent you to special schools. Obama also had the additional luck of being sent to special schools (on scholarship). Perhaps that has generated something of a guilt complex when you compare your double-luck (sperm and special schooling) with those who happen to have got a double-zip in those categories.
While I bless my lucky sperm and loving parents, I feel no guilt because my dad worked in a relatively manual and low-paid job (letter carrier) and we lived in an apartment in Brooklyn and I went to public schools from elementary thru college. I worked every summer and was never unemployed between college graduation and retirement (and am still working part-time teaching online grad courses for U. Maryland).
I think Obama can compensate for his lifetime work experience and understand that national wealth is created by profit-making businesses and the people who make them work (entrepreneurs, managers, technologists, factory workers, and so on).
I said in my original posting: “I believe President Obama is very smart and intellectually flexible and basically honest...
"I hope he can overcome his work experience ... he has demonstrated that he, personally, is a very hard worker. At Harvard, the law firm, in Chicago communities, and the legislatures, he has demonstrated tremendous intellect and industry and work ethic... I remain optimistic.
Ira Glickstein
I look forward to JohnS's reply to Howard"s critique of his comment.
It seems to me that the trillion-dollar stimulous bills were rushed through Congress in less time than it took them to rename "French fries" to "Freedom fries" and with less justification. Even the President said "I am signing an imperfect omnibus bill because it's necessary for the ongoing functions of government,..." [Emphasis added]. The bill is loaded with pork-pie earmarks (40% Republican and 60% Democratic - PEE-HEW!)
The alternative, costing half as much and creating twice as many jobs was rejected out of hand. As I said in my original posting: "... money will go to politically-connected states and cities and companies and unions and will probably be wasted (think of Boston's 'big dig' on steroids and spread over our entire Nation)."
Some stimulous was necessary - I do not favor just riding it out. However, the economy tanked rapidly partly because of pessimistic rhetoric from the left and the media and, I believe, it can rise almost as fast given optimistic encouragement and modest stimulous.
Do you agree with me that the market (DJI) will be up over 9,000 this year and to 10,000 within a couple years? Do you agree that consumer spending and reasonably available credit and a good job market will accompany and stimulate the market recovery? Do you agree our economy will emerge more "lean and mean" and stronger from this temporary correction?
Ira Glickstein
Ira, I don’t think I could state my position better than you did in your last comment.
Howard you state: “The Recovery and Reinvestment Act is the product of many competent experts across the political spectrum.” How was that accomplished in the few days it was written? I have worked as a staff member, albeit at a much lower level, and I know what it takes to develop a proposal, obtain a sign off on all pertinent points and prepare it for presentation, it aint quick or easy.
I suspect that the work was spread amongst many who wrote their own portion of the bill, inserting their own boss’s views and, of course, her pork. Few if any were assigned the duty of examining and collating all of these different portions of the bill to make sure the bill in total accomplished its intent.
I further suspect, and comments were made in the media, that few congressmen had read the entire document yet they felt competent to vote. It is nice to have a staff that is so competent that their work, to spend billions of our dollars, can be accepted without carefully scrutinizing their work.
Again, harking back on my experience, writing a bill to spend billions, maybe a trillion dollars would take longer just to outline the general concepts of the bill so that the staff could prepare the details than was given to write, debate the bill in both houses present the bill to the president who passed it.
I agree it is not a Mickey Mouse problem, but it was given a Mickey Mouse solution.
I hope this bill is successful. We did need a means of restarting the economy; if it doesn’t succeed, we’ve spent billions for naught.
Back to Ira for a moment, I to hark from a good gene pool, however I was the first to in my family to receive a college degree. That is neither here or there. Am I an L or a C? Neither and both. It entirely depends on the subject, which is probably true for all except the most radical of the left and right.
Economically, I would probably be considered conservative yet I favor FDR’s actions during the 30s and many of the so-called liberal actions since. I am against laissez faire capitalism. I am a partial libertarian. This is as it should be. Not a follower be.
We have a saying, amongst friends and family, if you haven’t been there, done that don’t criticize. Their lies a concern of mine. Neither the congress, their staff, nor the intellectuals that advise them have lived the lives of those they are serving. This applies to both Republicans and Democrats. I also believe it applies to Obama. In his early years, he saw the abysmal conditions of the poor, but, he hasn’t seen nor does he understand the taxpaying working middle class. I used to vote Republican, now I vote for neither or rather for those I feel will do the least harm. I feel there is a strong disconnect between Washington and the rest of the nation. A recent book, Life without Lawyers, by Philip Howard devotes a chapter to the Washington bureaucracy that is worth reading.
Ira and JohnS,
It is your opinions that the Recovery Act was too large and done too fast with too many earmarks. Both Obama and Geithner have explained the problem in detail. They agree the earmarks are bad, but speed is of the essence in the banking crisis. Until the banks are stabilized, there is no solution.
Contrary to your opinions, the latest Wall Street Journal forecasting survey of 49 economists, criticized the Obama teams actions for being too small and too slowly enacted, especially the key parts of plans to rescue banks. In spite of the Republicans organized opposition and a few Democrats they did the best they could.
The economists didn't just single out the U.S. for criticism; 70% of participants said the response of governments around the world to the global recession has been inadequate. "The Europeans or Japanese don't seem to be doing near enough to kickstart their economies," said Nariman Behravesh of IHS Global Insight. "It could be we've done all the right things, but the rest of the world goes down the tubes."
I prefer to go with the expert opinions in this case.
Ira,
I apologize if “disparaging” was the wrong word describing your statement, “[Obama’s] entire career has been based on pushing policies that take money from those who earned it and give it to those who (for whatever reason) did not.”
What is the right word? I don’t get the feeling that you meant to praise his career. So, what is your honest opinion of Obama’s career ethics?
What do you think a democratic govermenet should do about the underprivileged who have no money for a good education or health care (two of Obama’s goals)? Do you really believe that Vanderbilt had the right ethics, “Let them do as I have done” ?
Let's just use John, for John Sullivan. I use JohnS in lots of internet correspondance, but I'd prefer John.
Howard, I hope you are right, that the stimulus package will do the work. Ira predicts a turn around this year and I read a similar prediction in Time. What ever causes the turn around I'd like to get some of my paper losses back.
My opinion is only a layman's opinion however I am stuck with it until I get an explaination of how a bill of such monstrous size and complexity can be produced is such a short time.
John,
I'm sure you are right that such a complex bill can't be carefully prepared in that time. The AIG bonus scandal is one of the results.
The problem was that the financial house was on fire and it needed lots of water fast. All we can hope is that the fire is under control.
Cleaning up comes next, and it's a mess.
Howard
Howard, when we say "Robin Hood stole from the rich and gave to the poor" we are not disparaging him, are we? He is a folk hero of sorts.
I just stated a fact about Obama's work history, just like saying "President Eisenhower's career was in the military" or "President Reagan was an actor before he became California Governor" or any other factual statement.
The implication may be positive or negative. Individuals flock to different professions because of their predispositions and they are molded by their experiences in their professions. You and I could have become lawyers or journalists or whatever, but, because of our family background and talents and, perhaps, a great teacher or so, you became an academic and I and engineer. I place great value on conceiving and designing and building products and services people are anxious to pay for. You place great value on education, per se. Do you deny our professions have shaped our attitudes and world view to a large extent?
I thought I was very positive about Obama: "very smart and intellectually flexible and basically honest ... he has demonstrated that he, personally, is a very hard worker. At Harvard, the law firm, in Chicago communities, and the legislatures, he has demonstrated tremendous intellect and industry and work ethic."
As for my attitude towards the underprivileged, I am strongly in favor of good public elementary, high, and college education. The top 5% to 10% of every high school class should have guaranteed entry into their state college, with tuition and other assistance as needed. Once there (perhaps after a freshman tutoring class to compensate for substandard high school if required) they should sink or swim on their personal merits.
Ira Glickstein
WOW! The DOW-Jones Industrials went over 9000 today, fulfilling my prediction five months early.
On Friday the 13th last March, days after the DOW hit bottom at around 6,700, I wrote "The good news is that the market will probably recover nearly as fast as it dropped. I predict we will see it around 9,000 or more by year end and over 10,000 in a few years."
I provided this graph of my regression curve that shows the current "true" value of the market is around 10,000.
I also wrote "The bad news is that the high levels of the last decades, and in particular the peak of 14,000 in 2007, were unjustifiably optimistic and will not be seen again for many years.
Ira Glickstein
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