Market Hits High – What Are They Smoking?

The Dow Jones industrial average opened the fourth quarter by soaring more than 200 points at one point, putting the index well above its previous high set in July. At the close, the Dow was up 191.92 points, or 1.4 percent, at 14,087.55. The Standard and Poor’s 500-stock index rose 1.3 percent to 1,547.04, trading just beneath record levels, and the Nasdaq rose 1.5 percent, to 2,740.99.

from the New York Times

They were the best of times, they were the worst of times. The fact that the Dow Jones Industrial Average, the single most watched measure of the US economy, has hit an all time high at this particular moment defies all of our obviously imperfect understanding of hte underlying economic imperatives in operation.

As we constantly tell our business students, especially those questioning their choice of concentration, an understanding of the principles of business and economics is essential today for every thinking adult, regardless of their vocation or profession. For that reason our focus in grad school at the Institute of Latin American Studies at the University of Texas, many long years ago, was International Economics.

We must have been sleeping in class the day they explained how huge deficits, a credit crisis and the collapse of the almighty dollar are good for America’s businesses. Everything we thought we understood about living beyond one’s means, the balance of trade, the strength of the dollar, the flood of foreclosures, the dangerous exposure of US banks and financial institutions, the decline in real wages, the wanton accumulation of consumer debt as a motor for consumption, the effects of quadrupling the price of a barrel of oil and the transformation of consumer confidence into consumer cynicism is daily being proven a Casandrean fantasy or evidence of brain damage.

The New York Times article quoted above goes on to say, in the very next paragraph, “The advances came as Citigroup and UBS, two of the world’s largest banks, predicted steep declines in third-quarter earnings and announced billions of dollars in losses and write-downs related to subprime mortgage-backed securities and loans.”

Not to worry. It now costs EIGHT dollars to get on the subway in London. No problem, stay at home. From our RSS stream: “More Banks may join red-flag parade” Hey, my deposits are guaranteed by FDIC; “Toll mounts as more LBOs crater” Who needs leverage?; “Beware Big Oil stocks” They’re only making more than anyone else in the history of money; “Bye bye easy money” There’s always Tony Soprano. And the market loves it.

To a simpleton like the Dowbrigade, its enough to make our head spin. Our logic AND our gut tell us this can’t go on for long. It violates too many basic laws of economics and common sense. Of course, there is no denying the sheer size and dynamism of the American Economy. Its huge motors of production and consumption, and the incredibly complex capital prestidigitation needed to grease its gears, may keep gobbling up resources and excreting consumer goods for years on sheer momentum and inertia. It is the greatest, most complex system ever created by man, and it continues to set new records and reach new highs even as some of the basic assumptions which form its superstructure come into question.

It appears to us that the current continuing expansion of the domestic US economy and the stratospheric levels of US stocks are founded on five factors:

• The enduring paradigm of capitalism in which rich, powerful nations dominate the global exchange system, extracting raw materials and, increasingly, manual labor, from the poor countries and producing financial derivatives. As the richest and most powerful player at the table, the US is shooting craps with loaded dice.
• Authentic, technology-driven increases in productivity. Innovation and creativity in pursuit of profit produces results. This is the only honest and real improvement among the five.
• The increasing laborial treadmill on which the American worker is being drawn and quartered. Two, even three jobs per couple is becoming the norm. More workers are working more hours, with less vacation and less benefits, just to keep up with modern lifestyle demands. This is true throughout the econony, from the boardrooms of successful executives to the Yemeni immigrant down at the Quiki-Mart.
• As mentioned above, financial prestidigitation. The global economy is so gigantic and complex that it is rife with opportunities for local manipulations to create “investment opportunities” so arcane and opaque (see: derivatives) as to be impenetrable to common civilians. To most of us, these “opportunities” are as understandable and accessible as a David Blaine escape act or Daisuke Matsuzaka‘s Gyro Ball. Perhaps because of our primitive belief that anything beyond our comprehension must be magic, and therefore evil, the entire financial sector smells of smoke and mirrors, and sulpher smoke at that.
• Finally, and most significantly, America’s economic miracle is built and based on debt. National debt. Corporate debt. Consumer debt. Mortgage debt. Credit card debt. Leveraged debt. Personal debt. Public debt. Bonds, promissory notes, derivatives. Most of the people in the country owe money to the government, and the government owes money to most of the rest of the world. As well as bad business, this is a vast moral morass, which will be treated in a separate posting as soon as we get sufficiently outraged.

In the meantime, our advice is as follows: enjoy the good economic times and borrow as much money as possible. After all, the dollars you need to pay them back may be worth only half as much as the ones they give you, by the time the loan comes due.