Monday, October 06, 2008

The Feedback Loop Feeds Stock Drop

Europe and Asia are feeling the bite of the toxic paper crisis as well, and credit markets around the world are hurting. There's a spillover effect into the stock markets, and stock market indexes around the world have tumbled sharply today. One loss feeds into another, and by the time New York opened this morning, there was carnage from Hong Kong to Russia (which shut down after taking a big hit) to London.

Now, the NYSE is down over 700 points, in the biggest one day point drop in history, though in terms of a percentage drop, it still pales in comparison to the 1987 crash when the stock market lost 22.6% in value in one day. Following that debacle, the stock exchange instituted new rules calling for circuit breakers - when stock drop by set percentages, trading would be halted for a period of time depending on how far they dropped and the time of day.

The reasons for the stock market tumbling are numerous, but they boil down to a lack of confidence in the economy, the massive US bailout, and ongoing problems in the credit market.

The Europeans are struggling with what to do next, and the US is calling for a coordinated response, though I think that will fall on deaf ears. Far too many people are going to look at the situation and blame lax regulation, even though many of the problems stem from government intrusion into lending to subprime borrowers, mark to market rules that grew out of Sarbanes-Oxley, and a failure of Congressional oversight at a time when warning flags were being raised.

The fact is that we're witnessing a market correction, which we haven't seen in a generation. Prices got overheated in several market areas, and a perfect storm of the real estate bubble popping plus credit woes, led to the stock markets to shed value.

Now, this will eventually hit consumers in the pocketbook. If you're considering retirement now or within the next year, things are going to be quite rough because 401(k)s, pensions, and assets are getting hammered. If you're not retiring for 20-30 years, consider this a buying opportunity when all is said and done. Those companies that survive this culling will be able to thrive when the economy rebounds. In the meantime, sit tight. There is a herd mentality on Wall Street, and we're going to have a few more days like this before things settle down.

Government action may actually make the problems worse, and extend the pain for millions around the world. The US government has tried to prop up real estate prices at high prices at best at the same time they seek affordable housing by pushing subprime borrowing to keep sales churning, which may help sellers to some degree, but harms all buyers because it's more difficult to find a home that is actually affordable, and $700 billion in bailout money sure doesn't sound affordable to me.

Now, we're going to watch and listen to others call for still more homeowner assistance and bailouts. All this affordable housing was and remains unaffordable, and the government intrusion in to the market only makes the situation worse.

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