Dow 12,000 Cracked, 11,000 to Come

A bad sign in the stock market today as the Dow dropped below 12,000 for the first time in several months. That always seemed the level that coincided with Fed action, back when the Fed was in greater fear of market meltdown than inflation. But now the Federal Reserve's hands are tied, and nothing can be done save to watch the collapse.

This was a long time coming, and as a few of the readers here know, we have long complained that the market was not reflecting true or coming reality. Well, it's moving in that direction, which will only exacerbate the hurt in the real economy. It's one thing to take the hit in gas prices, or mortgage payments, or even the job, but combine that with growing losses in the 401K plan, and that makes the difficulty complete.

The Dow has not been below 12,000 since about October of 2006, while touching that mark back in March. This week's drop, according to the N.Y. Times, was due to continued worries over inflation and the health of financial firms.

Back in August or so of 2007 the collapse of Bear Strearn's hedge funds and the initial losses announced by Stanley O'Neal at Merrill Lynch were seen and judged almost as anomalies and non-normative. O' Neal received particularly harsh blame as though Merrill's situation was unique. Now we know better.

Clearly Merrill's losses were not unique, and the questions remain about asset valuation in the financial sector. Until that is cleared up, as in really cleared up to the point of full and accurate disclosure, the markets will continue to follow the lead of gravity.

I recall reading earlier today that credit card companies were beginning to tighten up on their existing card holders, decreasing credit lines and such, and we can only imagine that will increase, along with defaults going into next year as people get tapped out and the full scope of the economy's predicament becomes clear.

Friday’s losses came as oil prices rose, reversing Thursday’s declines. Crude oil futures in New York traded up $2.69, to $134.62 a barrel. Analysts speculated that the rise resulted from media reports of increased tensions between Israel and Iran which could, in the long run, decrease the supply of Middle Eastern crude.

Dreary reports on the prospects of regional banks, which have been battered by the tight credit market, also weighed down the major indexes. “People don’t know the extent of the damage,” said David Kovacs, an investment strategist at Turner Investment Partners in Berwyn, Pa. In many cases, he said, investors are barely aware that the regional banks exist.

N.Y. Times

In many ways people fail to truly connect with what is happening in the world. Right now it is the gas prices that are causing most of the grief, along with inflated food bills. Others are taking a full on hit with mortgage problems. But many go on without much thought.

I've got friends who are more concerned about new iphones than re-allocating the consumption towards capitalizing on the period we are in. While it's difficult to know an exact time to buy, or even what to buy, we are fast approaching a period of chaos where most everything will be so beaten down that bargains can be had.

Short of a systemwide collapse of capitalism, every fundamentally sound but struggling financial institution will bounce back. It might take some guessing to pick the exact moment they are at bottom, and it might be impossible to predict how long it will be till they rebound, but more than a few will, and in a large way.

In my mind 12,000 was an important marker. I don't imagine anything is going to propel us permanently back above that number for some time given all the unexpected and unclaimed losses working their way through the system; combine that with inflationary pressures that will force the Fed to follow a tighter path and we are in a different world.

Nor do I imagine people are really pricing in the damage hitting the farmbelt:

The floods have also disrupted other economic activity in the area. Tourism has fallen even in areas unaffected by flooding because people are avoiding travel to the Mississippi river area in general. Barge traffic on the Mississippi has been slowed as well.

Officials say this year's floods will likely surpass the devastation of the 1993 floods in the region, which resulted in losses of over $20 billion.

It's all so much, and all at the same time, and yet on a day to day level I don't know if the average person just ignores it all out of ignorance, bliss, or fear. Perhaps it is some of the company I keep.