Tuesday, January 22, 2008

Hold on to your hats: This is going to be a rough day for stocks 

Stock markets fell all over the world while the United States was having its annual moment of nostalgia for the time when racial justice was simple. This morning, stock futures are indicating a huge sell-off, perhaps more than 500 points on the Dow Jones Industrial Average. That will bring the Dow well below 12,000, and close to 20% from its high earlier in the year. If that happens, we will have moved from a "correction" to an Official Bear Market.

Now, bear markets are characterized by psychological pain on the part of the affluent class, including particularly among those who overextended themselves during the now-deceased bull. My feeling is that there are a lot of those people. High-end second homes may suddenly get a lot less expensive for those of you who have kept some powder dry.

Of course, stocks and other assets are also getting a lot less expensive in a hurry. The best thing that can be said about bear markets and economic recession is this: They perversely create opportunity, with the result that they always lay the groundwork for somebody's new fortune. Will it be your's?

MORE: This morning, the trader-commentators on CNBC were calling on the Fed to cut interest rates by at least 75 basis points. Well, their wish is the Fed's command. Fed statement:

The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent.

The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

It is tough times for traders, because it is hard to know what asset class will go up in the next year. Oil, gold, real estate, stocks, and the Euro all seem to have topped. Bonds? Not without some clarity on the inflation rate. If cash is king (as it often is in times such as these), it may be some time before you can make money merely owning stuff. That ought to delight the left, because it ought to cause a big shrinkage in the gap between the reported incomes of rich and not-rich.


By Blogger Christopher Chambers, at Tue Jan 22, 11:53:00 AM:

Speaking for we regular people, this is just payback for the new "greed is good, let's de-regulate energt/safety/healthcare/transportation, let's sell off the USA to the highest bidders whilst declaring other folk traitors" ethos.  

By Anonymous Anonymous, at Tue Jan 22, 12:54:00 PM:

Don'tcha just love watching the media create a crisis? I just wish I could get the inside scoop a few weeks or months before they start the campaign so as to position myself. I am never in cash or able to get into cash without killer taxes by the time the craze starts. Good reason for a balanced portfolio - just wait it out.  

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