January 24, 2009
Markets and Marxists Don't MixBy James Long
The three biggest changes in United States history since WWII, all three promising to have major impact on the future of the Republic, recently occurred within a period of a few weeks.
Socially, the USA has elected a black president, fulfilling the hopes and dreams that powered the long struggles for equality and recognition dating back to the War Between the States and before. This event promises to have a hugely positive effect, in the USA and throughout the world.
Politically, the USA has elected a far-left president, fulfilling an equally long struggle and threatening to fundamentally change the nature of the United States of America and its Constitution. Racial conflict preceding the War Between the States was contemporaneous with the early struggles of the socialists in Europe and in America.
This political development is not promising; no socialist system of government has ever had the record of employment, productivity, innovation, and growth that the USA has enjoyed under a system of free-market, rule-of-law economics. On the contrary, socialist states are universally noted for functional inefficiency and institutional corruption, including the European Union (the most benign of the lot), which has suffered economic stagnation and demographic contraction since its founding in the early 1990s.
Financially, the USA has taken the greatest economic hit since at least the Great Depression. This has destroyed major chunks of our retirement and pension funds, and has essentially ended the prospect of Social Security ever being viable.
There has been remarkably little comment or connection drawn between these political and financial changes.
Investors have taken massive amounts of money out of the markets in a very short period, resulting in a worldwide markets crash in the range of $30 trillion and counting. Given the extremely poor performance of all socialist governments, no investor is willing to leave his assets exposed to leftist incompetence, corruption, or confiscation.
Obama may have thought it a good idea to spread Joe the Plumber's wealth around, but millions of investors with trillions of dollars at stake pointedly declined to share Joe's fate, and unlike Joe, they had a choice in the matter. When these investors and their money departed, pension and retirement funds were left holding a hugely reduced bag.
This markets crash is unlike any other, quite apart from the sheer size of the beast.
Markets express a level of confidence in the future of the economy, and as Obama's election prospects improved, confidence in the economic future plunged.
Most major market crashes are preceded by frenzied trading activity and very high price/earnings (P/E) ratios. A long-term average for stock P/E values is about 13, and a P/E ratio over 26 is generally regarded as excessive. The DOW P/E ratio was over 40 and the NASDAQ P/E ratio was over 60 when those values started down during Clinton's last year in the presidency, so that, by historical standards, a recession was virtually assured, and it came right on schedule. The recent DOW P/E ratio has been benign after hitting a high of slightly over 20 in late 2007 at the peak of the DOW. Consequently, in 2007/2008 there was little of the turbulent extravagance that historically marks major market peaks that precede market crashes; something else was at work in the markets and that something was the prospect of a leftist as president.
The trigger event for the recent markets crash was the mortgage problem. The mortgage problem probably required about $1 trillion to bring stability and to allow property values to settle down, everything else being equal. But in the face of the worldwide market crash, the size of the mortgage problem cannot now be determined, because the markets are so uncertain. So, how did a $1 trillion mortgage problem morph into a $30 trillion worldwide markets meltdown? Aye, there's the rub.
Just for comparison, the NASDAQ fell $2-1/2 trillion during President Clinton's last year in office, and fell an additional $1-1/2 trillion before it stabilized in the first months of Bush's presidency. Other markets also took serious hits at that time. The result was a mild recession, because the proper corrective actions were known and were taken.
The Fed and the Treasury have been desperately taking corrective actions in today's markets, pumping mega dollars into banks and financial institutions and lowering interest rates in order to provide liquidity, because lack of liquidity and bank failures were major factors in the Great Depression. But it is now obvious that these actions are not working, and these actions have stopped. No one wants liquidity; everyone is searching for security. Investors that took their funds out of the markets were looking for a safe place to park their money, and were not looking for new investment opportunities. Banks seem to be stabilized at this point, but beyond that, corrective actions so far are having no effect in reviving the economy and businesses, and what we learned in the Great Depression has no application when confronting a socialist-led government in the USA now.
Unemployment is soaring, and will continue to soar as investment capital dries up. Investment pays for new construction, plants, office buildings, and equipment, and the massive withdrawal of cash from the markets means that investment, and jobs, will falter and fall. Borrowing money for an infrastructure-building stimulus package, as Obama proposes, is a dubious proposition at best.
Markets sometimes have an almost prescient ability to sense future troubles, and it is easy now to see that the fall of the DOW corresponds quite closely with the rise of Obama's presidential prospects. But, as they say, the DOW has signaled nine of the last five recessions.
Still, the markets do not make major world-class moves in the absence of any stimulus or provocation, and this is by far the biggest markets reaction in history, with all indications that this is just the start. The election of Obama to the presidency of the United States is a radical, radical change in direction. The election of a leftist was an assault on both our financial institutions and our defining values.
There is a broad range of projections for the future of the United States economy. Obama himself has stated that it will get worse before it gets better. We do know that investment capital has massively fled the markets, and this is a very bad sign for employment, growth, and productivity. Elimination of wasteful governmental socialist actions such as the War on Poverty (cost $6 trillion) and the Fannie and Freddie Mortgage Follies (cost unknown) would be a necessary first step to recovery, but from all indications, Obama intends to double down on activist government intervention.
The United States of America has had a remarkable run for over two centuries, and that run has been the product of our Constitution and a free citizenry. A citizen of the United States of America is in a privileged position in relationship to all the subjects, serfs, and slaves throughout most of the world. If you want your citizenship and your country you will have to fight for it, because socialists think they have a better idea, even though they invariably get worse results.
James Long is a professional engineer and manager.