An Economic Opinion: The DJIA Glance

Take this for what it’s worth, another explanation of why I’m not worried about the “biggest point plunge” in history from the Dow. Again, I’m not, in any way, a professional on this matter and, as such, cannot offer any actual financial/legal advice.

fig. 1

Yesterday, Monday September 29th, 2008 the Dow Jones Industrial Average (DJIA) dropped almost 778 points; the highest single-day point drop in history. It’s a fact. The news has said it, you can reference charts/graphs/illustrations; there’s no falsehood to this. However, the selling point is that this is in fact “spin”. While it was the largest point drop, it was only a mere 7% drop; certainly worse than we’ve seen since 1987, but the fact remains that on a month to month basis, we’ve seen the DJIA drop 4-5% and even 3-4% on daily averages. It’s not that big of a deal. The thing we have to remember that undermines the “biggest point drop in history” mentality is that when you deal with high volume exchanges such as the Dow, you’re going to see high volume movements. That’s why the fact that the Dow dropped 778 points is no big deal (because it’s only 7%). Check out fig. 1 and fig. 3. We’re trading at levels higher than we were three years ago. Because of this, you have to expect expensive and volatile movements, both up and down.

fig. 2

Another thing to look at, specifically in fig. 2, is the movement of the Dow over the past week. Before opening bell on September 29th, everyone expected the bailout bill to pass without a hitch. However, if this was a relevant fact, we would have seen stocks rise at the opening bell, not fall dramatically as they did. All day stocks dropped dramatically. Don’t get me wrong, this is a serious thing and I think I heard that something like $1.2 trillion (may not be true) was lost in the market. However, congress won’t convene again until Thursday, so there’s no hope of a bailout bill being passed until then. I found it interesting that, this morning, as the markets were up news anchors were saying that “It’s because investors are looking forward to this bill being passed”. Excuse me? Every smart investor knows that this bill is highly criticized and that the earliest it could be adopted is Thursday. The reason the market is up is because the DJIA hit a 3-year(ish) low yesterday and smart investors are seeing this as a “bargain bin” of investments. I know that I would.

fig. 3

I heard a professor this morning on CNN remind everyone that the Dow Jones consists of 30 companies and that “30 companies does not the stock market make”. While this is true, the news generally only reports on the Dow, most likely because of its daily volatile movements. But, in looking at the DJIA over the past week, decade, and thirty years, it’s pretty obvious that the oh-so-dreadful 778 point drop is being made dramatic as part of a scare tactic and a way to drive up a slow news day. 778 points is a lot, but what’s more important than that is the percentage; 7. 7% is no dreadful movement. In fact, today the DJIA ended up nearly 500 points above yesterday’s close. Now we’re only at a 200 point loss over the past two days; somewhere around a 2% loss. No big deal.

The only reason that this has made major news is that it affects not only “fat cats” on Wall Street, but those of us on Main Street, too. It freezes the credit market and no one can get a loan. That’s what everyone is saying and it’s true for the most part. The only folly with that logic is that banks now are struggling to find good borrowers to loan money to. Banks are actively seeking out low-risk borrowers! The issue that got us into this mess began with the housing market and the federalized banks giving loans to people without checking credit history/credit scores. Now, because the housing bubble has burst, we, as tax payers, are expected to cover the losses of these high-risk institutions. No thanks. I’m not getting scared into that one. My money will stay in the bank and my investments will remain where they are. I rent because I can’t afford loan payments. Maybe Americans need to learn the harsh lesson of balancing their budgets and not living beyond their means.

A CNN poll posed the following: “What should Congress do now that the bailout bill has been defeated in the House?” 42% of respondents (114,027) said that congress should “draft a new rescue plan”. 58% (160, 297) said that congress should “let risk-taking financial institutions fail”. I’m in that category with 160, 296 others.

It’s going to hurt, but we can’t fall victim to media scares and we can’t trust a federal government that already has the banks federalized to make proper investments. The banks made risky decisions to loan to people with no business borrowing money and they, along with myself, need to learn the lesson. It won’t be easy, but it’s the right thing to do.

Again, I’m not giving advice. I’m telling my story and my opinions. I’m no professional. Charts courtesy of Google Finance.

*All statistics either approximate or accurate at time of research.

Bailout Failed!

I don’t really find it necessary to say that I disagree with the Wall Street bailout. However, in case there are any doubts, let it be known that I disagree with the Wall Street bailout.

I’m no Public Administration major. I’m not an economist. I’m not a person that enjoys bureaucracy and I’m not a person that’s even mildly interested in economics. My opinion on the bailout is based on the fact that I have traded stocks on the market for years and, even more surprisingly, I’m putting an ounce of faith in the Von Mises Institute of economics.

When trading stocks, there’s a principle that tends to hold true in free market economies. It says that if a stock falls at a dramatic rate without an absolute reason, the stock will not remain at that low price for very long. A lot of day traders know this as the “too fast, won’t last” adage. The U.S. economy has been struggling for quite some time, preparing itself for a recession, which is vital for any free market economy as it rests up for another up. We’ve propped the economy up with surplus dollars and created faulty bank markets, housing markets, and dot com markets (all three bubbles have burst). It’s silly to try to prop the economy up like this, as we’re just prolonging the inevitable and, in fact, the longer it takes to enter the recession, the harder the recession will be. Over the past week, the economy has begun to fall quite drastically; 5-7% daily. The $700 billion would save the economy from entering a recession now, but would likely cause a deeper recession or perhaps a depression within the next decade. Honestly, the “too fast, won’t last” adage applies here. The faster the economy falls, the sooner we get into a recession, the quicker the recession ends. Simple day trading economics.

Secondly, the Von Mises Institute predicted this “disaster” a long time ago. When former presidential candidate Ron Paul talked about how the economy was headed for a downfall everyone laughed at and ignored him. Well, here we are only a month from the election and Ron Paul has suddenly become the topic of many major news stories, making near daily mentions on Fox News. Chuck Norris has even begun to endorse Paul as the standard of what politicians in Washington should be like. So, since the Institute predicted this “disaster” and no one listened, I’m willing to sit and trust their diagnosis while everyone else panics that the bill failed.

I also find it abhorrent how detrimental the news crews are making this failed bill sound. It won’t be the failed bill that destroys the country, it will be the panic caused by the media. Famous talk show host and financial adviser Dave Ramsey agrees.

More Housekeeping!

For the sake of my own OCD and to add a bit more professionalism, I’ve taken out a couple of sections, putting this site at a “Bare Minimum Operation Level”. That’s what I like to call it.

Also, updated the headers, made all images target new pages/tabs, changed the UTC stuff, replaced the calendar with a slightly less attractive but amazingly more functional archive, and cleaned up the “Design Work” tab a lot.

Sorry for making such a big overhaul, but I’m trying to make this place a little more homely, as I have a feeling that I’ll be using it a lot more.

Housekeeping

After about two months of no updates, I did some stuff.

- Added photography of mine to the “Other” section.

- Wrote a new post about the presidential debate, awesome.

- Did a little cleaning on the “Pets” section.

- Did some cleaning/restructuring of the “About” page.

Presidential Debate 1, 2008

So, I missed a lot of the debate on September 26th, but managed to catch the last 40 or so minutes.

I didn’t have to see the first hour to know that John McCain had just gotten totally annihilated. Obama was on fire, blasting McCain’s policies, insisting that McCain was continuing the same failed policies that had existed over the past 8 years, although he did agree with the senator on a few nuances.

However, the debate isn’t of much concern to me, as it involved two similar candidates that vary on issues and not on values. While I am opposed to the military presence in Iraq (it’s not a war, quit saying it is), I am very aware that if we leave, the government is pretty much in shambles. We need to spend time training their military to fend off rogue insurgents. Therefore, I am against any set date departure from Iraq. However, I do agree with what seems to be more along the lines of Obama’s plan; a severe troop withdrawal, leaving behind enough troops to train Iraqi soldiers and establishing a temporary military base.

Sounds good. I can agree with that, to be honest. I’m anti-war but things have to be done a proper way once they are begun.

Here comes my first issue on the debate: Senator Obama, what makes Iraq so special? Yes. It costs us billions of dollars every month, but what about the troops in Germany, South Korea, England, Bosnia, Italy, and the other hundred and something? What makes it totally reasonable to leave Iraq and stay in Japan? What sense does it make that we keep South Korea’s army weak so that we are required to stay and keep the DMZ up? What, in the name of consistency, makes Iraq any different?

My second, and final concern, is in regards to the bailout:

Both Senator McCain and Senator Obama are in favor of the proposed $700 billion bailout. While each will attest to compromising to add partisan legislature to the bill, the fact still remains that both senators want to see the bill passed.

My concern with this is that the individuals at the Von Mises Institute predicted this disaster looooooooooooooooooong ago. In fact, it was one of Ron Paul’s running points. Everyone ignored Paul on the issue, saying that the fundamentals of the economy were strong and that we were not headed for/in a recession. The same economists at Von Mises will tell you that without the 700b dollar bailout, we will have a short, hard recession. No joke. However, if the bailout passes and goes through, the economic short coming will be more likened to a softer, considerably longer depression.

The bailout plan assumes that, by bailing out Wall Street, we can avoid a recession (absolute bull crap, given capitalism and free market economies). It also assumes that by bailing out Wall Street, the burden on taxpayers will be lessened in the long run as opposed to if the bill does not pass. This is absurd, as any one with a degree in economics can tell you that recessions are necessary in any self-regulated economy.

So, both Barack Obama and John McCain are attempting to pass legislation that subscribes to the theory of “Trickle Down Economics“. It didn’t work before, it won’t work now.

On a different note, the bailout is absurd to me because we’re propping up banks/lenders, which are centralized banks, with tax money. The stupid thing is that we’re giving 700 billion dollars to the same institution that originally controlled the investments for these mortgage companies. Honestly, if I paid a stock broker thousands of dollars and they all fell through, I highly doubt that I would pay him another thousand dollars.