News What is wrong with the US economy?

[drankin]

There will always be impoverished people. In this country, it is squarely the fault of the individual. Some people are just bums and they have right to live like that way. Overall, the US economy is good in my opinion. In my field there is much more work than there is people. That is a good problem to have.

 

[edward]

I note that the Dow, which just lost 280 points the other day, a sure sign that something is wrong with the US economy. And it just gained 247 points the day after, a sure sign that something is wrong with the US economy. Is up 16.7% during the lifetime of this thread.

(13289 - 11392)/11392 times 100% = 16.7%

The Dow has been up and down like a roller coaster. It has seen unparalled volatility in recent months. Although what happens on a given day may appear good or bad, the instability is what has investors spooked.

If you are a 'the glass is half empty' advocate, I should think you would avoid the Dow as supporting evidence, or at least wait for another time to display this particular broken clock.

Some people see the glass as setting much to close to the edge of the table.

 

[Jimmy Snyder]

Some people see the glass as setting much to close to the edge of the table.

Do you mean by this analogy that the economy is bad, or that it is in danger of becoming bad?

 

[edward]

Do you mean by this analogy that the economy is bad, or that it is in danger of becoming bad?

I see a possibility that the economy could go down the tubes. It depends on whether or not the market gets nervous enough to jiggle the table.

 

[Art]

I see a possibility that the economy could go down the tubes. It depends on whether or not the market gets nervous enough to jiggle the table.

The thing bothering the markets is the onset of a credit squeeze as a result of the sub-prime/housing crisis.

With banks afraid to lend money to finance takeovers, mergers and equity funds etc share prices fall as there is less money going into the system. This links directly to the general economy in several direct ways as the consumer economy too is reliant on credit so again a reluctance by banks to make unsecured loans reduces consumer demand whilst the fall in house prices and share prices reduces the equity people can borrow against.

Unchecked this can lead to a self-perpetuating downward spiral which the fed are trying to counter by pumping money into the finance sector to increase liquidity and by reducing interest rates to help people avoid defaulting on loans and to encourage borrowing (assuming banks will lend the money). IMO it will be a very uncertain next few months while folk wait to see if this policy will work. Many analysts believe it is too little too late and confidence is already too damaged to recover anytime soon which could lead to a major recession.

Another serious risk to the US economy is the fall in the value of the dollar against the other major world currencies. This will hit inward investment and bond issues (which finance US debt) hard!

 

[Jimmy Snyder]

The thing bothering the markets is the onset of a credit squeeze as a result of the sub-prime/housing crisis.

There's a name for this kind of stock market analysis, I think it's "single-issue' analysis but I 'm not sure. The idea is that when the stock report is given during the general news, you hear something like "The Dow was up today on news that consumer confidence remains high" and then they go on to sports or something like that. One is left with the feeling that the market is more complex than that. In any case, I don't think that the day to day fluctuations of the stock market, or even the month to month, will help you to decide whether the US economy is a good one or a bad one. In spite of the thing bothering the markets just now, the Dow is the same as it was in early May which was itself a historical high at the time.

 

[Astronuc]

GDP growth not reaching paychecks

The economic recovery that began in 2001 has lifted productivity growth and employment of late, but has had little impact on many workers' wages.

NEW YORK (CNNMoney.com) -- The economic expansion that began six years ago has failed to benefit most workers, according to a report from the nonpartisan Economic Policy Institute, released Monday.

Productivity growth, although slower of late, has been strong since 2000. After a sluggish start in the period, employment has picked up, although at a slower pace than in past recoveries. Yet, that growth hasn't transferred to workers' paychecks, particularly for workers at the lower and middle end of the pay scale, the report found.

After rising quickly in the second half of the 1990s, most workers real wages have been stagnant in the 2000s, especially since 2003.

Housing troubles worsen for the poor
The numbers of low-income families devoting high levels of income to housing costs are soaring, according to a new study.
By Les Christie, CNNMoney.com staff writer, Sep 3 2007

NEW YORK (CNNMoney.com) -- The housing boom may have ended, but even at its peak, it left legions of low-income, working families worse off in its wake.

According to a new study from the Center for Housing Policy (CHP), an affiliation of the National Housing Conference (NHC), the percentage of low income households forced to spend more than half their earnings for housing needs exploded as housing prices boomed.

From 1997 to 2005, the study said, the number of low-income workers who rented their homes and spent more than half their income on housing more than doubled to 2.1 million from about 1 million.

http://www.epi.org/content.cfm/newsflash_070830
On the sixth Labor Day of this economic recovery, the pace of progress ranges from slow to stalled for the nation's middle- and low-wage working people. Even the modest wage gains from the beginning of this recovery period have been fading. Since 2001, real hourly wages rose only 3% for the middle-income worker, with none of this historically small progress occurring after 2003. While most working people remain stuck in the economic slow lane, the better-off among us have avoided the congestion on the ground by flying over it. Since 2001 those with wages higher than 95% of all workers have seen their wage rise by 9%. A new EPI report, Economy's Gains Fail to Reach Most Workers' Paychecks, analyzes the state of working America this Labor Day, looking behind the latest data to the forces at work in an economy that doesn't seem to be playing by the rules. (Media kit)

Bush tax changes wreck budget
Recent data show what extending the Bush tax cuts means for balancing the federal budget and compares their cost to the projected increase in costs for Social Security and Medicare/Medicaid.

New poverty, income, and health insurance analysis The annual Census Bureau data release shows real income gains for the median household and a decline in poverty, but the reality is many working Americans are just working more at lower wages.

 

[turbo]

Despite the cheerleading from the administration, there are problems. Bernie Sanders hits the hot spots here:

http://www.huffingtonpost.com/rep-bernie-sanders/no-on-nussle_b_62902.html

 

[drankin]

Well, apparently Americans work their butts off compared to the rest of the world:
http://www.foxnews.com/story/0,2933,295556,00.html

A persons wages are precisely what they settle for.

 

[edward]

Well, apparently Americans work their butts off compared to the rest of the world:
http://www.foxnews.com/story/0,2933,295556,00.html

A persons wages are precisely what they settle for.

From the link:

Americans Are World's Most Productive Workers, U.N. Report Finds

Working at what? Flipping hamburgers. We aren't exactly an industrial power house anymore. The real work is being done in China.

This is a feel good comparison. Americans, especially the younger generation don't even know how to work anymore.

http://money.cnn.com/2007/08/22/new...kers.fortune/index.htm?postversion=2007082306

 

[drankin]

From the link:


Working at what? Flipping hamburgers. We aren't exactly an industrial power house anymore. The real work is being done in China.

This is a feel good comparison. Americans, especially the younger generation don't even know how to work anymore.

http://money.cnn.com/2007/08/22/new...kers.fortune/index.htm?postversion=2007082306

Someone has to flip the burgers! The day I go to BK and there's no one to flip my burger is the day America is gone! LOL

We are the most PRODUCTIVE, even if we do ship all the labor out of the country. The numbers don't lie.

 

[Astronuc]

Adjustable-Rate Mortgages Fuel Foreclosure Crisis
http://www.npr.org/templates/story/story.php?storyId=14218075

All Things Considered, September 6, 2007 · New foreclosure filings hit an all-time high this spring. And that was before the latest turmoil in the mortgage market.

Defaults are heavily concentrated in seven states, according to the Mortgage Bankers Association. Three of those — Michigan, Indiana and Ohio — have been hit with heavy job losses. But the other four — California, Arizona, Nevada and Florida — have a different problem.

"What's going on in these four states is, first of all, they tend to have very high levels of adjustable-rate mortgages," says Doug Duncan, chief economist for the association.

When those mortgages adjust upward, some people are unable to make the payments, and the problem is likely to continue for at least another year.

Two weeks ago, a San Diego nonprofit group called Community HousingWorks had a workshop for homeowners facing trouble with their mortgages. Seventy families showed up.

. . . .

New Foreclosure Rate Surges to Record
http://www.npr.org/templates/story/story.php?storyId=14210771

NPR.org, September 6, 2007 · A record number of people started the foreclosure process in the April-to-June quarter, according to the Mortgage Bankers Association of America.

The MBA, which represents the real estate finance industry, reported Thursday that the rate of loans entering the foreclosure process was 0.65 percent, versus 0.43 percent in the same period a year ago. Most of the increase was for subprime loans.

"This quarter's foreclosure-starts rate is the highest in the history of the survey, with the previous high being last quarter's rate," the organization reported. Last quarter was just seven basis points lower, or 0.58 percent.

. . .

Some 2 million ARMs are due to reset to higher rates this year, making monthly payments unaffordable for many.

Meanwhile, the delinquency rate — derived from those who are behind in their payments but have not yet entered the foreclosure process — rose to 5.12 percent of all loans. That's up nearly three-fourths of a percentage point from the same period a year ago.

. . .

So the president and congress may act, especially in an election year.

One possible solution - Own-to-rent
http://marketplace.publicradio.org/shows/2007/09/06/AM200709061.html

Farrell: You know, the idea is out there. See there's a real problem with bailouts and let's just use the word bailout loosely all right? You don't want to reward speculators and you don't want to reward lenders. You really want them to suffer, you want that pain. They deserve to go to the seventh circle of hell anyway right? Now, but you do want to protect the homeowner that was misled. The benefit of this idea is that it's the most targeted idea I've seen that helps out that person, doesn't throw them out on the street, doesn't force them to go through foreclosure, and at the same time forces the lenders and the speculators to take a financial hit.

 

[turbo]

Own-to-rent doesn't sound too bad. Putting the cost and responsibility of property management on the aggressive lenders would make them think twice about foreclosure, and could encourage them to restructure the mortgages so that the home-owners could afford to keep their houses and not fall into bankruptcy.

 

[Jimmy Snyder]

There's this renter who has decided that they can afford a house after all, but got bait and switched into buying a more expensive house than they could afford. How can this be? The down payment was only sufficient for the cheaper house, and the monthly mortgage is more than the salary will support. The answer is creative financing. The smaller down payment is approved by the bank and the loan is low interest for the first two years. No one on the face of the planet believes that the owner will be able to take the hit when the two years comes to an end, so why was the deal agreed to? The answer is that both sucker and suckee went into the deal with the same idea. House prices will rise, and the buyer will raise cash either by taking out a second mortgage, or selling the house at a profit. No other scenario makes sense. In this sense, they were all speculators and the speculation fell apart, house prices didn't rise. I've lost money in the stock market, but no one cried over my loss. Now someone else lost money on a speculative deal and I am asked to make it right. It rains in California, and I get soaked in New Jersey. That's what's wrong with the US economy.

 

[edward]

The down hill slide, is going to cost a lot of jobs in other areas, especially Title companies.

Countrywide cuts heighten loan crisis
The lender plans as many as 12,000 layoffs. CEO Mozilo says the downturn is the most severe in recent history.

http://www.chicagotribune.com/business/la-fi-countrywide8sep08,0,1751291.story

 

[Astronuc]

In the first 8 months of 2007, there have been a little over 500,000 layoffs, but apparently most have found other jobs, or they were offset by others being hired. Of that number, about 70,000 layoffs were in the finance, primarily mortgage, business.

U.S. payrolls contract by 4,000 in August
Major surprise; economists had been expecting growth of 115,000

Nonfarm payrolls fell by an estimated 4,000 in August, the Labor Department said. This is the first decline since August 2003.

The nation's unemployment rate held steady at 4.6%.

The decline in payrolls was much weaker than the 115,000 increase that had been expected by Wall Street economists surveyed by MarketWatch. See Economic Calendar.
Adding to the sense of weakness in employment, payrolls in June and July were revised lower by a cumulative 81,000.

Fed has cover to cut rates, if it wants

The numbers released Friday were almost universally grim:
*Nonfarm payrolls fell 4,000 in August, the first decline in four years. After large downward revisions to June and July data, payroll growth has averaged just 44,000 per month over the past three months -- down from about 150,000 earlier in the year.
*Manufacturing payrolls dropped by 46,000, the most in four years. Construction firms cut 22,000 workers. Only a few areas maintained strength, with healthcare adding 35,000 jobs and restaurants hiring 24,000.
*The nation's unemployment rate remained at 4.6% -- but only because 340,000 people, as calculated by the Labor Department, dropped out of the labor force.
*Employment as measured by the household survey fell by 316,000 in August and is down 132,000 for the year.
*The employment rate, representing the percentage of adults working, fell to 62.8%, the lowest since December 2005.
*The percentage of industries that were adding jobs in August fell to 51.3%, the lowest since late in 2003. Among 84 manufacturing industries, roughly one-third -- just 32.7% -- were hiring.
*The total number of hours worked in the economy has fallen since June.
*Employment in public schools dropped by 32,000, the second straight decline that has most analysts scratching their heads.

 

[edward]

The mortgage companies apparently had no problem going along with the sub-prime loans. In many case people simply could not qualify for loans. Yet they did receive loans.

"We jokingly called them 'liar loans,'" said Anita Luciano, a former First Magnus underwriting manager in Houston. "A borrower can state their income and state their assets — and you approve their loans."

http://www.azstarnet.com/business/200430

 

[Astronuc]

Americans living beyond their means by HERB GREENBERG
Commentary: Economist Paul Kasriel sees party ending, hangover beginning

SAN DIEGO (MarketWatch) -- You will have to pardon Paul Kasriel, chief of economic research at Northern Trust in Chicago, if he hasn't been the life of the party over the past seven or eight years.

The 60-year-old economist, tapped in 2006 as the top economic forecaster by Arizona State University's W.P. Carey School of Business, has spent a good deal of that time trying to warn anybody who would listen about such things as excessive household debt while taking a jab or two (or three) at then-Federal Reserve Chairman Alan Greenspan. "Illusory" is how, in October 2004, Kasriel described the wealth created by Greenspan's interest-rate cuts in one of his edgy and somewhat irregular reports dubbed, "The Econtrarian," which are available on Northern Trust's Web site. A few months later, as household spending continued to sizzle, he wrote, "Today's 'partying' in terms of a disproportionate share of national output being 'consumed' by the household sector is a recipe for a 'hangover' tomorrow."

And in case you are wondering whether Kasriel has any regrets about having provided less-than-rosy outlooks that challenged conventional wisdom while others were celebrating record home sales and soaring stock prices he doesn't. "I look at the numbers and I have a sense of history," he says, as the sound of wind causes his voice to fade in and out during a telephone interview while he was on a sailboat on Lake Michigan, where he spent this past week.

Sailing on that lake, known for its unpredictable conditions, is an appropriate hobby for an economist like Kasriel. He believes sailing makes him a better forecaster. And as a forecaster, he is concerned more than ever about the economy, which he believes could be headed toward a "painful" recession. His analysis confirms the anecdotal evidence presented earlier this year in my column and blog items that suggested Americans are living well beyond their means. "I don't make up the numbers," Kasriel says. "And since the late 1990s, I've been seeing trends that are very disturbing."

He is particularly alarmed at the relationship between personal disposable income and personal consumption expenditures and residential investment expenditures. That is eco-babble for the amount of money people take home after taxes minus the amount they are spending on everyday goods and services and what they spend on buying and fixing up their homes. According to that calculation, Americans have been running deficits in six of the past seven years.

With ARM's switching to higher interest rates and highly leveraged consumers, a downturn in the economy could spell recession, since consumers will not be able to purchase goods and services, which will cause a reduction in prices or loss of revenue for companies.

The Fed has to be very careful with regard to interest rates, but the pressure is there to lower the discount rate.

 

[Greg Bernhardt]

The feds will almost certainly drop the rate 1/2pt by the 18th or sooner. In the words of Jimmy Cramer "THEY KNOW NOTHING!"

 

[Astronuc]

Paulson: U.S. to Hit Debt Limit Oct. 1
http://marketplace.publicradio.org/apheadline_detail.php?story_id=D8ROQ6O80&group=ap.online.headlines.business
By MARTIN CRUTSINGER
AP Economics Writer

WASHINGTON, Wednesday, September 19, 2007 05:13:04 PM PT

Treasury Secretary Henry Paulson told Congress on Wednesday the government will hit the current debt ceiling on Oct. 1. He sought quick action to increase the limit, saying it was essential to protect the "full faith and credit" of the country, especially at a time of financial market turmoil.

The limit is $8.965 trillion. Unless Congress votes to raise it, the country would be unable to borrow more money to keep the government operating and to pay debt obligations coming due.

The United States has never defaulted on a debt payment but the decision on whether to raise the debt ceiling often means a prolonged battle in Congress.

Paulson wrote congressional leaders that according to data now available, the Treasury expects to reach the ceiling on Oct. 1 _ the first day of the new budget year.

That projection does not take into account moves the government often has to use, such as withdrawing investments from certain trust funds to create room for extra borrowing until Congress finally approves a debt increase.

This month, the Senate Finance Committee approved increasing the limit on the debt to $9.82 trillion. That boost of $850 billion would be the fifth since President Bush took office in 2001.

I think Robert Reich pegged it!

http://marketplace.publicradio.org/display/web/2007/09/19/reich_commentary/

Robert Reich: A few weeks ago, the president justified his bare-bones plan to help out a few of the millions of homeowners who got caught in the sub-prime loan mess, explaining "it's not government's job to bail out... those who made the decision to buy a home they knew they could not afford."

But yesterday, the Fed justified its rate cut by citing turmoil in financial markets as a threat to economic growth. Ben Bernanke, the Fed chief, says he's determined to take whatever action is needed to "promote the orderly financing of markets." Read: Bail-out the big lenders, credit rating agencies, financial intermediaries, hedge funds and all the well-paid executives behind them -- because they're simply too big to fail.

When it comes to risky behavior in the market, America has a double standard. Average workers and small businesses get clobbered for mistakes like borrowing too much money.

Yet the big guys with lots more information and experience evaluating risk are let off the hook. It's not just the current subprime mess -- think of the Chrysler bailout of 1979, the 1998 bailout of giant hedge fund Long-Term Capital Management, price supports for big agribusinesses facing market downturns.

CEOs who drive their company's stock so low their boards eventually fire them get fancy goodbye gifts. Although Home Depot's market valuation dropped 40 percent during Robert Nardelli's reign, he left with a $210-million golden parachute.

But if you're an average worker who gets canned from his job through no fault of your own, you probably won't even get unemployment insurance. Fewer than 40 percent of job losers qualify these days.

Meantime, bankruptcy has become the standard way CEOs who screw up can wipe the slate clean and try again.

Donald Trump's casino empire has gone into bankruptcy twice, while his personal fortune is protected behind a wall of limited liability. But an ordinary person in trouble can't wipe the slate clean because a new law governing personal bankruptcy makes that route harder than ever.

The subprime mortgage saga is the same old story: The little guys get tough love, the big guys get forgiveness.

 

[Astronuc]

What is wrong with the US economy?

Lack of viable competition in telecom/ISP on the local level. Grrrrumble

Costly low speed service that is occassionally disrupted. Grrrrrr.

 

[wildman]

In the sixties, LBJ and the Democrats borrowed and spent like crazy on guns and butter and ended up with wild inflation in seventies. In the 2000's Bush and the Republicans spent like crazy on guns and butter and ... What makes you all think it will turn out differently? As Einstein once said, "The definition of insanity is doing the same thing and expecting a different result."

Keep in mind this warning: Things looked real good economically in 1968 also...

 

[edward]

Bill Moyers Journal hit the jackpot this week in an interview with John Bogle, founder of the Vanguard group. This episode really nails private equity firms and how they are having a negative effect on the economy and the American people.

If nothing else, just watch the first five minutes and I think you will want to watch the rest.

http://www.pbs.org/moyers/journal/09282007/watch.html

 

[Astronuc]

John Bogle, 77, created The Vanguard Group, Inc., in 1974, which today is one of the two largest mutual fund organizations in the world, and was was the first index mutual fund. He retired as Chairman and Chief Executive Officer of the fund in 1996, yet remained Senior Chairman until 2000.

In 2000, Mr. Bogle established the Bogle Financial Markets Research Center with Vanguard, which supports his continuing work on behalf of mutual fund investors.

"My estimate is that the financial sector takes $560 billion a year out of society," Bogle explains to Bill Moyers. "Banks, money managers, insurance companies, certainly annuity providers. They're all subtracting value from the economy."

http://www.pbs.org/moyers/journal/09282007/profile.html

We need more folks like Bogle!

 

[edward]

http://www.pbs.org/moyers/journal/09282007/profile.html

We need more folks like Bogle!

Thanks Astronuc. I had decided that I should come back and add some short text excerpts from the transcript of the program.

The following which was of your choosing is perfect.

"My estimate is that the financial sector takes $560 billion a year out of society," Bogle explains to Bill Moyers. "Banks, money managers, insurance companies, certainly annuity providers. They're all subtracting value from the economy."

I also find the fact that there is very little accountability to be very disturbing.

BILL MOYERS: What does it say that big private money can operate so secretly, with so little accountability, that the people who are hurt by it, the residents in the nursing home have no recourse?

JOHN BOGLE: It says something very bad about American society. And you wonder — the first question anybody would have after reading the article — how in God's name do they get away with that? Well, we have all these attorneys that are capable of devising complex instruments, and money managers who are capable of devising highly complex financial schemes. And there's kind of no one to answer to the call of duty at the end of it.

Big names like the Carlyle Group are hiding their dirty deeds behind a myriad of complex documents and corporate double talk.

 

[Jimmy Snyder]

As I write this, the Dow is down close to $30. I think that nails it for the 'half empty' crowd. I wonder what makes the market so nervous just now. Meanwhile, in the real economy, things are booming. It's like a balloon. You can squeeze it and say 'it's smaller here', but it's bigger somewhere else. Of course, the whole thing could burst. Perhaps that's what's weighing on the market today.

 

[edward]

As I write this, the Dow is down close to $30. I think that nails it for the 'half empty' crowd. I wonder what makes the market so nervous just now. Meanwhile, in the real economy, things are booming. It's like a balloon. You can squeeze it and say 'it's smaller here', but it's bigger somewhere else. Of course, the whole thing could burst. Perhaps that's what's weighing on the market today.

The market was up just yesterday?

Read the transcript from the Moyers link.

Just as private funds like Carlyle are flipping companies for the quick profit, the market is hopping up and down due to the fact that too many investors are now more interested in short term speculation rather than long term investment.

Even mutual funds have changed more towards the short term. Previously mutual funds held the average stock for 7 years, the average stock is now held only 1 year.

With short term speculation driving the market the least little issue can cause rapid changes. Investors want to pull out with the least bit of bad news and jump back in with any perception that things are improving.

For instance according to the financial news yesterday's gains were attributed to the fact that investors no longer see the housing/mortgage situation as a problem. Where did that idea (fact) come from? The housing/mortgage problem has only just begun. It just wasn't in the news much this past week.

I think recently a lot of the nervous market syndrome is associated more with perceptions rather than actual facts or events.

I still see the glass, whether half full or half empty, as setting to close to the edge of a jiggly table. Hopefully it will eventually jiggle back towards the center.

 

[Jimmy Snyder]

The market was up just yesterday?

Yes. But not significant historically.

Just as private funds like Carlyle are flipping companies for the quick profit, the market is hopping up and down due to the fact that too many investors are now more interested in short term speculation rather than long term investment.

Is that good for stock prices, or bad? Are private funds like Carlyle the cause of volatility in the markets? Or have markets been volatile since Nineveh.

 

[edward]

Yes. But not significant historically.

Sure I know it wasn't a historically significant up. It was more of an example of the recent constant "nervous market" scenario. And it was up despite the fact that Citi Group announced a major loss, which normally of late would have taken the market down.

Is that good for stock prices, or bad? Are private funds like Carlyle the cause of volatility in the markets? Or have markets been volatile since Nineveh.

I only made a comparison of the private funds going for the short term speculative profit and stock market investors apparently doing the same thing. However, If short term speculative investments work in one sector they inevitably will be tried in another.

I have been around a long time. In my life's experience I have never seen the market bounce around on an almost daily basis the way it has in recent years.

If you are suggesting that the markets have always done this continuous nervous daily bounce around, I would like to see some substantiation of that claim.

 

[turbo]

edward, it may not be as much a matter of a "nervous" market, but a market that is being manipulated in the very short term by trading programs that are designed to look a small short-term swings and buy on speculation and sell to "lock in" profits. The market has built-in circuit breakers to suspend program trading in the case of large rapid swings, but it's likely that the people designing trading programs can dampen their trading to avoid that.

 

[Art]

I have been around a long time. In my life's experience I have never seen the market bounce around on an almost daily basis the way it has in recent years.

If you are suggesting that the markets have always done this continuous nervous daily bounce around, I would like to see some substantiation of that claim.

I agree with you I think it is a trait that has developed over the past few years for a couple of reasons;

a) Far faster communication and information allowing investors to react instantly to any new price stimuli. This was helped by the SECs's ruling a few years ago forbidding private briefings for the big boys which levelled the playing field for the small investor.

This in turn has led to;

b) A shift in investment strategy by the small investor from buy and hold for the long term to daily management of one's portfolio as their investment decisions are no longer influenced primarily by following what the big investment funds are doing as happened in the past when the big investors had far more information than the small investor and all the small investor could do was follow.

And so I don't see the daily shifts in the markets as a sign of nervousness, more just the extra volatility one would expect from the new investment paradigm. As an example if you follow Canadian ADRs, excluding other inputs, you will see the price of shares change in lockstep with currency fluctuations between the US and Canadian dollar demonstrating how investors have changed from 'batch processing' of data to 'real time processing'.

BTW Jimmy, post# 226 refers to the DOW being down $30?? Not to be picky but the Dow is an index and so is not measured in any currency.

 

[edward]

edward, it may not be as much a matter of a "nervous" market, but a market that is being manipulated in the very short term by trading programs that are designed to look a small short-term swings and buy on speculation and sell to "lock in" profits. The market has built-in circuit breakers to suspend program trading in the case of large rapid swings, but it's likely that the people designing trading programs can dampen their trading to avoid that.

That has been on my mind all along. I was just trying to get a certain person to admit it.

There are definitely some big time short term investors that are manipulating the market to take the short term profits without triggering a suspend trading program.

It is really the only thing that explains why the market is hopping around all over the place every other day or so.


As Bogle stated on the Moyers program:

And this short term thing where short term orientation in which trading pieces of paper is regarded as a social value. It is not a social value.

Bogle was of course referring to the financial markets, but I have no doubt that the same statement could apply to the stock market and all of it's pieces of paper.

 

[edward]

I agree with you I think it is a trait that has developed over the past few years for a couple of reasons;

a) Far faster communication and information allowing investors to react instantly to any new price stimuli. This was helped by the SECs's ruling a few years ago forbidding private briefings for the big boys which levelled the playing field for the small investor.

This in turn has led to;

b) A shift in investment strategy by the small investor from buy and hold for the long term to daily management of one's portfolio as their investment decisions are no longer influenced primarily by following what the big investment funds are doing as happened in the past when the big investors had far more information than the small investor and all the small investor could do was follow.

And so I don't see the daily shifts in the markets as a sign of nervousness, more just the extra volatility one would expect from the new investment paradigm.

I tend to agree, but it takes more than just the small investors to start an up or down trend.

 

[Art]

I tend to agree, but it takes more than just the small investors to start an up or down trend.

But it doesn't. Institutional holdings of a company's shares do not normally change much at all on a day to day basis unless something extraordinary happens and their holdings typically account for a large % of the float. It is the demand and supply for the balance of the shares held by small investors that create the wild daily price swings on relatively low volumes especially when you consider that volume oftem consists of one person buying and selling the same stock possibly dozens of times in a day.

This has become a game which many people devote a lot of time to. In fact you can actually play against thousands of other people on sites such as MSN's CAPS site

 

[edward]

But it doesn't. Institutional holdings of a company's shares do not normally change much at all on a day to day basis unless something extraordinary happens and their holdings typically account for a large % of the float. It is the demand and supply for the balance of the shares held by small investors that create the wild daily price swings on relatively low volumes especially when you consider that volume oftem consists of one person buying and selling the same stock possibly dozens of times in a day.

I disagree with you there. I don't think individual traders can start anything. They most likely can add to it once started.

I would more tend to believe that there are several large "institutions" that have as their sole purpose to disrupt the market and do the profit taking. The FTC would never allow individuals to wield that much power.

The small individual investors , if lucky, get a small piece of the pie to keep the game going.

 

[Art]

I disagree with you there. I don't think individual traders can start anything. They most likely can add to it once started.

I would more tend to believe that there are several large "institutions" that have as their sole purpose to disrupt the market and do the profit taking. The FTC would never allow individuals to wield that much power.

The small individual investors , if lucky, get a small piece of the pie to keep the game going.

Institutional and other large holdings >5% are reported publically check them out and you will see very small net changes over the course of a month so if it's not them and not the individual shareholders moving the markets then who does that leave? I think you are seriously underestimating the power of leveraged instruments and the power of investment sites such as MSN's to herd the small investors in the same direction. You only need to upset the initial equilibrium to create the oscillations day traders use to make (or lose) money especially with the profligate use of stop/sell orders and shorting of stock people use today indeed some commentators have suggested that the greater volatility in the very recent past is a direct result of the abolition of the 'up tick' rule.

Not so long ago buying or selling shares necessitated a trip to the bank to see your broker and then a wait of a few weeks until your stock certificate arrived before you could even think of selling them on. These days at the push of a button you can make trades guaranteed to be executed in seconds.

BTW It is a fact 80% of fund managers do worse than the market average so who do you think is making the profits??

 

[Jimmy Snyder]

I have been around a long time. In my life's experience I have never seen the market bounce around on an almost daily basis the way it has in recent years.

If you are suggesting that the markets have always done this continuous nervous daily bounce around, I would like to see some substantiation of that claim.

I never suggested anything like it. But you have said that it hasn't in your life's experience. You offer no evidence and then put the onus on me to substantiate the opposite. Nice.

How about this:
Measure of volatility.

 

[edward]

Witch's Money

I remember many years ago circa 1960 having an economics professor who required the class to read an old short story (1940) by John Collier. The title of the story was Witch's Money.

In the story an artist bought a house in a small village in the Pyrenees mountains. He wrote a check to pay for the house. The villagers were amazed by this small piece of paper that could be turned into money.

There was a small fee that the seller of the house had to give to the bank for cashing his check. Feeling cheated by this the man who sold the house gradually spread his anger to the entire village.

Feeling justified the villagers eventually killed the man and took all of his checks. They then started writing checks to each other for various services. One had another dig him a well. The man who dug the well wrote a check to another who planted a new vineyard for him. With this new found wealth the village became greatly improved

This went on until all of the small pieces of paper had been used. As the story ends the village men have taken a bus to the city and have entered the bank with big smiles on their faces.

The professor compared this story to the U.S. economy circa 1960. He claimed that our economy works in much the same manner and at some point we will arrive at the bank.


The way I see it now is that whenever one group arrives at the bank another artist moves into the village.

I guess the question currenlty should be , do we have enough artists?

Just thinking out loud

 

[edward]

I never suggested anything like it. But you have said that it hasn't in your life's experience. You offer no evidence and then put the onus on me to substantiate the opposite. Nice.

How about this:
Measure of volatility.

Am I supposed to be impressed? The link only shows that there was volatility in the market during times of crisis. This link explains your link as to history of voatility.

http://www.investmentu.com/IUEL/2005/20050729.html




The advertisement at the bottom of your chart is a much more revealing sign of the times.

- $200k loan for $896/mo* Intro Terms.

 

[Jimmy Snyder]

Am I supposed to be impressed?

No, you're supposed to substantiate your claim.

 

[edward]

No, you're supposed to substantiate your claim.

Are you kidding , you did it for me. My claim was that the market has not always been this skittish. Historically the market has only been volatile during times of crises. Have we been in a continuous crisis since 1985?? not hardly. And the graphs show it. Yet admittedly there have been more times of crisis since 1985 than in the previous 20 years.


I can not remember or find any evidence of a time when the market fluctuated so much on a nearly day to day basis as it has in the past year.

 

[russ_watters]

I'll get back into this thread more tomorrow probably, but I just want to point out two things:

First, of course, here we are, just under 3 months from when the stock market started it's "correction" as I called it (actually, it wasn't bad enough to actually be a correction) and the market has fully recovered. No bear market. I dropped out of the thread because I didn't want to do a day-to-day back-and-forth about what the stock market was doing. It did take longer than I expected to get back up - I didn't realize how bad the sub-prime mortgage thing was (bad, but not on par with things like the S&L scandal).

Second, volatility. People keep talking about it like it means something - like we're seeing something unusual here. We aren't. The stock market goes up. The stock market goes down. The stock market goes back up again. That's what it does. All told, the Dow went down slightly less than 9% from it's high and recovered in less than three months. That's not bad at all.

A "correction" is a 10% drop. A Bear Market is a 20% drop. We had bear markets in 2000, 2001 and 2002, including three swings of more than 15% over a 6 month period and an overall drop of 33% from 2001 to 2002 that took more than two years to recover from. (I've pointed this out before)

If that isn't enough, there are actual measures of volatility. Here's one: http://finance.yahoo.com/q?s=^vix
Here's the historical values:
http://www.investmentu.com/IUEL/2005/20050729.html
At 18.5, we're above the volatility of the past two years and below the volatility of the previous six. The index briefly (for less than 2 months) went up as high as 31, indicating a relativly short and minor period of volatility as people tried to get a handle on the sub-prime mortgage issue and real estate downturn (a 1-2 punch that didn't end up being that bad).

Jeez, you people have short memories and thin skins!

[edit: heh - these are the same links others posted. Edward, did you read your own link? Btw, 1998-2001 (first half) was not a time of crisis, it was high volatility due to the internet boom.]

 

[russ_watters]

I can not remember or find any evidence of a time when the market fluctuated so much on a nearly day to day basis as it has in the past year.

One day in the past 3 months is worth remembering and it was the seventh biggest drop in market history - so it was only barely worth remembering. If you can't remember some of the others that were worse, you are just plain not trying hard enough:

http://en.wikipedia.org/wiki/List_of_stock_market_crashes

 

[Jimmy Snyder]

My claim was that the market has not always been this skittish. Historically the market has only been volatile during times of crises.

You realize, of course, that the second of these two sentences does not support the first. Neither does the chart. The current volatility index is 18.49. Run a line across the chart you linked to at the 18.49 level. The low for this year was 9.39. Run a line across your chart at that level. The high this year was 37.50. Run a line across you chart at that level. Compare this to your statement:

I can not remember or find any evidence of a time when the market fluctuated so much on a nearly day to day basis as it has in the past year.

 

[edward]

Guys I am not talking about; record highs, record lows or corrections. I have lived through them. Perhaps volatility isn't the word I should be using although it is the word most frequently used by the media.

For about the third time I am stating that I have never seen the market make the frequent and smaller down 250 up 240 cycles that I have seen in the past year or so.

I could be wrong, but I honestly just do not remember a prolonged period of time with this type of fluctuation.

The news media doesn't help with their constant hype of the situation. For that matter IMHO the media, including the Internet, could be part of what drives the situation.

I can also see, however, that these smaller fluctuations could be a result of market manipulation.

 

[Jimmy Snyder]

For about the third time I am stating that I have never seen the market make the frequent and smaller down 250 up 240 cycles that I have seen in the past year or so.

The climate is getting milder. When I was a child, we used to get snowstorms where the snow would come up to my waist. But nowadays it only comes up to my knees.

 

[Futobingoro]

We should make sure we aren't getting confused about the magnitude of these "smaller cycles." Movements of 250 points are certainly more likely to happen when the Dow is in the vicinity of 13,000 points. This may seem enormous, for instance, to someone who grew up in the 80s, during which the Dow passed 2000. Percentages are probably a better choice to focus on. It's not too difficult to drum up volatility furor by noting drops and gains of 300 points - it sounds large. The calculated volatility indeces (though I don't know how they are calculated) probably take proportion into consideration.

 

[edward]

The climate is getting milder. When I was a child, we used to get snowstorms where the snow would come up to my waist. But nowadays it only comes up to my knees.

And I am gaining physical strength. When I was a young man I could barely carry $10 worth of groceries, now I can easily carry $50 worth.

OK so I am an old fogey, but seriously, I can not remember ever having heard the term: "The markets are nervous today" the number of times that I have in in this past year.

 

[Jimmy Snyder]

I still see the glass, whether half full or half empty, as setting to close to the edge of a jiggly table. Hopefully it will eventually jiggle back towards the center.

I not sure you get the gist of the expression 'half empty or half full'. It is really asking whether you are optimistic or pessimistic, it has nothing to do with glasses. Are we to take your 'edge' comment as meaning you are pessimistic? Keep this principle in mind:

Pessimism never pays.

Unless of course, it does. For instance, I note that the VIX is down nearly 10% today. I've lived a long time and have seen many things too. This is the most volatile that the market in volatility has ever been. If you truly believe that people are selling volatility too cheaply, why not buy it from them?

In any event, as with life itself, the market always has been and always will be close to the edge of disaster. Meanwhile, I'm planning to market a couple of new financial instruments. VIX futures, and options on VIX futures. My advertising will say "If you think the markets are volatile now, just wait and see what tomorrow brings". What do you think?

 

[russ_watters]

A good article the other day on volatility: http://www.usatoday.com/money/perfi/funds/2007-10-03-volatility-q3_N.htm?csp=34

The funny thing about the article is that the title doesn't match the content of the article! The title is "More volatility could lie ahead for investors" (which is, of course, trivally true) while the article says:

If you're feeling queasy from the leaps and plunges of your 401(k) account, brace yourself. The market's gyrations aren't likely to slow anytime soon.

One reason: Historically speaking, volatility was unusually low from 2002 through most of 2007, says Russ Koesterich, head of investment strategy at Barclays Global Investors.

"Money was cheap and plentiful, and in that type of environment, volatility is usually low," Koesterich says. The market is returning to more normal levels of volatility now.

But I suppose if they had titled it: "Volatility returning to normal after years of being unusually low - people with short memories and a fear of their own shadows skittish; everyone else, unfazed" it wouldn't be very catchy, and a little cumbersome.