Is it something about October that makes the stock market crazy? Or is it just that the economy naturally ramps down until investors start getting nervous at that season? Could it be the Harvest Moon (or the Headless Horseman)? I don't know. Maybe it's the election, fast approaching.
Whatever it is, we're in another October Meltdown. Last Monday, the Dow crashed nearly 800 points. It went back up some, the next day. But the rest of the week it slid down several hundred more points. On Oct. 6, it crashed another 370, by day end, after diving down as much as 800 during the trading day. Today (Oct. 7) the Dow dropped another 500+ points and finished under 9500 - the lowest level since October 2003.
I call this the Democrats' Death Spiral because Dems have done their best to talk the economy down for nearly two years. Under a steady media drumbeat (doom-doom-doom...) the man on the street began to feel discouraged about the economy. Although he probably had a job and was doing OK, he got the impression that things were bad everywhere else. I call this the "local effect", wherein people think the country is in a mess, although their own situation is pretty good. Polls showed consistently high majorities believed the country was "on the wrong track". This made businessmen cautious. Investors picked up the vibrations and got even more cautious.
The Dow hit 14,000 in July 2007, but soon began a long slide. As it slid, people grew more pessimistic about the future. Democrats ceaselessly hammered the "failed" Bush presidency for the "worst economy since the great depression". Open talk commenced of the current situation becoming another Great Depression - not just a recession - although no recession had yet begun, under the technical definition. Finally, though, the full effect of the mortgage crisis, the weakened banks, and the frozen credit markets has tipped the market into a full-fledged crash.
The downward spiral is becoming inexorable. With selling reaching a full-throated panic, investors are taking actual losses, not just paper losses. (Until you sell a security whose price has fallen since you bought it, there is no actual dollar-loss. It's all "on paper".)
As voters get more depressed by the loss of wealth - both paper and real - and by the slowing of the economy, they increasingly migrate into the Democratic column. Mr. Obama is growing stronger, four weeks from the election. It looks like he has it in the bag. It is what Democrats had fervently hoped for.
Mr. Obama's increase in the polls pushes investors further into panic, since they know he will raise taxes on investment income, adopt anti-business policies, and punish wealth and high earnings. Mr. Obama is the most liberal member of the Senate and the most left-leaning candidate for president since Franklin Roosevelt. A commentator today opined that many investors are fleeing the market with whatever they can get before President Obama comes in to raise taxes.
The more investors flee the market, of course, the farther down it goes. This delights Dems, who know voters always run to their side when they feel economically threatened. Democrats won't necessarily improve anything, but people somehow think they will.
Ordinary people who dabbled in the market without considering whether they can stand pat during a serious Bear market, have lost actual billions (in the aggregate) by selling out low. The more they sell, the farther down the spiral goes, and the more Mr. Obama's stock rises. It is the Spiral of Death for the wealth of millions of Americans, unless they can resist the urge to sell out and get what they can from their diminished (on paper) holdings.
Even Democrats are getting a little nervous about the stock market and the economy. After all, most Democrats don't really want to damage the economy. They only want to jawbone it down a little to make voters feel like things are bad - as Bill Clinton did in 1992. Mr. Clinton invented the "Worst economy since the Great Depression" shtick. The media were uncritical of this bogus claim, and George H. W. Bush didn't even refute it, considering it too ridiculous to address.
Mr. Bush didn't realize, however, that millions of young voters, who barely knew what the Great Depression was (or when it was), lacked a frame of reference to assess Mr. Clinton's claim. So they swallowed it whole. After Mr. Clinton's election, reports emerged that said, "Surprise! The economy isn't as bad as we said it was." Economic measures were already moving up when Mr. Clinton took office, and the economy was soon humming.
This time, though, it might not be so easy to steer the economic ship away from the rocks it is heading for. Last week, it was widely thought that Congress's enactment of the gigantic ($700 billion) rescue package for the banking industry would restore fiscal soundness and let business get going again. The bailout was necessitated by banks holding hundreds of billions in overvalued non-performing mortgages, whose collateral is worth less than their loan balances. Banks were in deep financial trouble from holding these devalued instruments. Inter-bank lending was grinding to a halt because banks couldn't be sure the bank they lent to wouldn't fail before repaying.
The expected enactment was perturbed by political events, however. First, the House of Representatives did not pass the initial measure on September 29. House leaders thought they had the votes to enact the bi-partisan package, but just before the vote was taken, Speaker of the House Pelosi sank her own bill with a highly partisan attack on Republicans and the Bush administration.
In a bitter blast, Speaker Pelosi laid responsibility for the financial meltdown squarely on the GOP, while completely ignoring roles played by Rep. Barney Frank (D-MA), and Senators Chris Dodd (D-CT) and Charles Schumer (D-NY) in recent years. Mr. Schumer had pooh-poohed any questions about the soundness of Fannie Mae and Freddie Mac as recently as this past spring. He and other Democrats had been either asleep at the switch or in bed with the people they should have been regulating.
Her speech was too much for House Republicans, enough of which defected to cause the bill's defeat, 207-226. Democrats supported it, 141-94, but Republicans supported it only 66-132. Days of recriminations followed, with Mrs. Pelosi denouncing Republicans for not supporting their president's bill, while delicately omitting the inconvenient fact that 94 of her own party had opposed her leadership. I saw no mainstream media reports linking Madame Speaker's speech to the bill's defeat. On the day the bailout failed, the Dow index crashed nearly 800 points.
In the week since, the roller coaster has gone up and down. A modified version of the bailout bill finally passed on Friday, October 3rd, but the stock market (Dow) sank by more hundreds of points on that day. This week, the market has gone into virtual free-fall, falling by nearly 900 points in two days. No one can tell what will happen now, but the portents are not favorable. Unless investors can shake off a collective nervous breakdown, the market could crash into territory not seen since the aftermath of the 9-11 terrorist attacks.
The stock market is the "collective mind" of the country - more so now than ever in our history. Over 50% of households are now invested in the market, up from 1/3 in the 1990s and 20% in 1980. That collective mind expresses its optimism or pessimism or fear or approval by how it acts in the market - buying when they are ebullient about the future, and selling when they are not. What my grandma called a "panic" - she often spoke of the Panic of 1907 when she was a young woman in New York - is basically a "run" on the stock market, when investors sell out and try to salvage something.
Today, investors are saying they don't see a very viable future for the direction things are moving now. There is far too much uncertainty, and the certainty they see - i.e., a probable Obama victory - looks worse than the uncertainty. We are heading for the Winter of our Discontent. Global warming or not, it's going to be a long, cold one.