Market Fear is back for Investors

London, England

It’s the end of the world as we know it – and we feel fine. Really.

Usually, markets stumble along, day after day. But occasionally, their hearts start racing and their palms sweat. They stop sleeping at night and begin pacing the room. When this happens, one of two emotions has gotten the better of them – greed or fear.

Greed made fools of investors for many years. At its height – probably in 2006-07 – people were ready to do the damnedest things with their money. The moms & pops bought an extra house – sure it would go up. The masters of the universe sold moms & pops’ debt to each other. Rich investors gave their money to hedge fund managers – and paid them hundreds of millions for gambling it away. Others paid fortunes to executives to run companies they didn’t really understand into brick walls they didn’t see coming. But, for many years, everybody was getting rich; so what was not to like?

Now, fear is back.

Delayed...denied...denounced...fear is back -- and he’s mad as hell.

This week, panic set in. On Monday, the Dow fell more than 350 points. After such a big drop, you’d expect a big bounce. But not yesterday. Stocks just kept falling, with the Dow down another 508 points.

Oil rose $2 to $90. The dollar held steady at $1.36 per euro. And gold rose $22. Coin dealers say they can’t keep up with the demand for bullion coins. No wonder; smart investors are looking for shelter.

It’s full scale war, in other words, with the forces of inflation in full retreat – even rout.

Investors await every bit of news like dispatches from the front lines. Will the Dow hold at 8,000? When will the Fed cut rates? Can our soldats keep the huns out of Paris?

The news comes fast – too fast to take it all in. Today, Russia has lent 4 billion euros to Iceland – ‘we’ll work out the terms later,’ said the Russians. The Russians are also pumping $37 billion into its own banks. England says it will bailout its banks – with 50 billion pounds of equity and another 200 billion in loans. England...then the US...then Europe – each is expected to cut rates to try to ease the crisis. The Australians already cut their key rate by 1%. At first, it looked like it might turn the tide in the Asian theatre. Reports last night showed Asian stock markets holding the line. But this morning comes news that Japanese stocks are falling even harder – down 9% today alone.

In the US, the Fed says it will buy commercial paper; that is, it will buy up loans made to US companies...or even loan the money directly to troubled firms. And not just financial firms. General motors says it is turning off the lights at all its European production plants.

The poor lumpeninvestor doesn’t know what to make of it. It seems like only yesterday he was told that everything was all right. Alan Greenspan said so. So did Hank Paulson. And Ben Bernanke. And George W. Bush. We have the strongest economy in the world. We’re unbeatable. Our economy is so dynamic! Our financial sector is so inventive! We’re just so damned smart! The Japanese can live with a 20-year slump if they want. The Europeans never seem to get their economy revved up. But we Americans know how make an economy hum – just give the consumer more credit!

But when the cycle turns from greed to fear...all that credit is like excess fuel in a crash landing. It tends to explode. When a bank takes a loss – say, from its holdings of sub-prime debt – the fractional reserve credit system sends out sparks. A loss of $100 million causes as much as $1.5 billion in credit to go up in flames. As the credit disappears, so does the leverage that kept up asset prices. So far this year, the world has lost $20 trillion in market capitalization. By September, US property was down a total of about $6 trillion over the last two years. That’s why the feds are losing this fight – they’ve got much less fire power. They’ve just passed a bill to put $700 billion back into the system – buying up Wall Street’s mistakes. The Fed is loaning another $900 billion, according to yesterday’s report. Put all the bailout spending together and you get a figure that is still not even 10% of what Mr. Bear Market has taken away.

Yes, it’s all working against us now...the credit...fractional banking...and our own emotions.

More thoughts:

*** This morning, walking to work, your editor was worried. The end of the world might not be as pleasant as he had hoped. These worries almost turned him into the latest victim of the credit crunch. That is to say, he almost got arrested.

What was he worrying about? He has no debt; but he has huge obligations. Of his 6 children, only one is really self-supporting. Others are in school or just starting their careers. He has houses to maintain – on two continents. And he has a business in full expansion...with new offices...and new products. Under the circumstances, expenses are not easily cut – to say nothing of taxes!

But that’s what happens in a real panic. Each man looks to his own. How will he pay his mortgage? How will he be able to retire? How will he keep food on the table and a roof over his head?

He begins to think...to reflect...to regret. If only he’d sold those stupid bank shares. If only he’d gotten out of India and China. If only he’d sold his business...put the money in gold...and retired – when he had the chance!

The latest figures show American retirement accounts have lost $2 trillion in the last 15 months. That is, of course, in addition to the amount lost in the real estate market.

Naturally, these financial losses are now migrating to the economy. A report from MasterCard tells us that consumers are cutting back sharply. There was a big drop in September retail transactions, via credit card, says MC.

“Unfolding Worldwide Turmoil Could Reverse Years of Prosperity,” says a headline in the Washington Post. Not exactly. What is actually happening is that the prosperity is being revealed for what it really was – phony. If people had been spending money they had earned – the money that you get when you are truly prosperous – we wouldn’t have such a problem today. Instead, people spent money before they earned it. And now, their earnings are turning down...their assets are losing value...and they have no way to repay the loans. So, the loans go bad...the banks lose money....and credit is withdrawn throughout the entire system... forcing further sales, lower prices, more bankruptcies, more job cuts...and more worries.

Thus it was that your editor...his mind troubled by all these heavy concerns...walked into his office building without his identification badge.

“Where’s your pass,” the guard wanted to know.

“Oops...I must have forgotten it.”

“Then, you’ll have to wait here until someone from your office comes to collect you.”

Your editor is a calm fellow. But whereas he had been working in this very same building for the last 4 years...and whereas he and the security guards have seen each other practically every day... and whereas he was eager to get to his desk and find out how much money he lost yesterday – he permitted himself to throw a fit.

Fortunately, rather than call the police, the guards let him pass.

*** Finally, we rise to the defense of a dumbbell.

We like Sarah Palin; we don’t know what she is talking about. But she is the only candidate we can’t make fun of.

Consider this. You will find it hard to follow. Because it is not in English; it is in Palinese:

“That’s what I say that I like every American I am speaking with we’re ill about this position that we been put in where it is taxpayers looking to bailout, but ultimately what the bailout does is help those who are concerned about the healthcare reform that is needed to help shore up our economy, um, helping the, oh, it’s got to be all about job creation, too, shoring up our economy and, and, putting it back on the right track; so health care reform and reducing taxes and reigning in spending has got to accompany tax reductions and tax relief for Americans and trade... we have we got to see trade as an opportunity not as, a competitive, um, scary thing, but one in five jobs being created in the trade sector today, we we’ve got to look at that as more opportunity, all of those things under the umbrella of job creation, this bailout is part of that...”

But just because the woman is a half-wit hardly disqualifies her from public office. The average county commissioner or governor is not much better. And at least one of America’s finest presidents was probably little smarter than a moron.

We refer to Warren Harding. He was one of the greatest of American chief executives. No one was ever sent to prison under the Harding Act. No gaudy office building in Washington is known as the Harding Building. And no monument we know of defaces the earth in his memory. He started no wars. He spent no more of the taxpayers money than his predecessors. And he never gave a lecture to the American public that anyone could make sense of.

Three cheers for Warren Harding! Three cheers for Sarah Palin!

P.S. If you enjoyed this article then we encourage you to sign up for the free Fleet Street Daily eletter. Learn what you can expect from today's markets -- and how to prosper in the face of uncertainty. You won't find more thought provoking writing anywhere on the Internet.

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Market Fear is back for Investors

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Market Fear is back for Investors