Friday, August 12, 2011

Mixed Signals

The art of human behavior is still a mystery to many of us.  During some point in our lives we come across an unfortunate situation: do they like me?  No matter how you slice it, you can’t tell.  All we get are mixed signals, like crossed wires.  One day things are great and the next you might as well live on opposite sides of the country.  You wonder why they haven’t messaged you back, or if they’ll call (do you need to provide a subtle reminder what your number is?).  You realize the offender is changing tactics more times than P. Diddy changes his name (is that his most recent name?).  This is a problem.

That is the story of financial markets this week.  We started off with a sovereign credit downgrade (very bad) by S&P and the U.S. stock market reacted by dropping by 634 points, to the largest one day drop since the financial crisis began in 2008.  Then on Tuesday the market jumps back up by about 400 points, Wednesday loses the entire gain (and then some), and Thursday the market (Dow Jones Industrial Average) comes back yet again to recover most of Wednesday’s losses.   Who knows where Friday will take us?  Hopefully at least back to where we were last week – or right back to where we started.

What does this all mean?  We had an active week but not a productive one: we just went in a big circle (or enjoyed 2 periods on an oscillating curve for you smart people).  There is nothing worse than trying to move forward only to end up where we began.  It all comes down to wealth (money, what a surprise).  If the stock markets are “down” then the value of the companies being traded are generally worth less.  If companies are worth less, then they have less money to grow and invest, and (more importantly) potentially have less money to pay us employees with.

For those of us risk seekers, we could be directly losing wealth if the market tanks and we own stocks, bonds, mutual funds, or whatever else is out there.  Ultimately, the effects of a stock market crash are far reaching and multiply out to all ends of the economy.  We felt the crash of 2008 even if we didn’t own stocks (the market dropped by almost 4,500 points, or 40% in 6 months of which 1,500 were lost in one week).  We heard over and over how Wall Street hurt Main Street.  Enter stimulus package and bank bailouts to stop the bleeding.

If the U.S. markets keep oscillating, people around the world will become less confident and less willing to invest in markets that are still not on solid ground from the last crisis in confidence.  To cure the symptoms we need to address the root of the problem: the U.S. economy as a whole is giving mixed signals.  This latest bout started with a month long debate on whether or not the U.S. would default on our debt (think what would happen if everyone stopped paying their mortgage).  This week we find out new jobless claims are down (good, fewer people lost their jobs this week than last week and the 4-week moving average is down for the sixth straight week), yet on the same day (yesterday) data shows our trade deficit jumped to $53.1bn in June, the highest since October 2008.  To make matters worse, the oil deficit actually shrank – the increase in this new debt we owe to people abroad is led by non-petroleum goods and by a 2.3% drop in exports (not good, making money from people abroad is an important source of revenue).  Oil debt is something that is hard to fix, but manufactured goods is something we should be able to work on. 

In other words, we should keep the roller coaster rides to amusement parks (they even do coasters in themes).  This might require some shifts in the way we do business.  Otherwise buckle up: we may be in for a wild ride ahead.

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