October 31, 2008
Halloween came early this year, at least for the global financial markets. I don't need to recount the story for you at this point -- plummeting Dow, giant credit freeze-up, houses worth less than the interest due on their mortgages, foreclosures, layoffs, strife, misery, locusts.
Okay, I might have exaggerated a little. I haven't seen any locusts. Yet.
But even though we've been through a lot, there's still plenty out there to frighten the children -- at least, the economically savvy ones. While the acute panic seems to be subsiding as people come to grips with the current economic reality, chronic unease remains.
And economic demons continue to lurk. Here are a few.
- The VIX. Nope, it's not a mentholated cold remedy, it's an index that tracks -- via information gathered from the options market -- the market's current estimate of its future volatility. Got that? It's best thought of as a measure of the current likelihood of panic. The good news is that it's down from its all-time high of almost 90 (set last Friday, by the way). The bad news is that it's still at levels that would have been considered insane just a few weeks ago. It's amazing how quickly huge swings -- just yesterday, Manitowoc (NYSE: MTW ) was up almost 26%, Liberty Media Interactive (Nasdaq: LINTA ) down over 23% -- have come to seem routine, isn't it?
- The liquidity trap. "Liquidity trap" is an economic term for what happens when interest rates get close to zero: People (including banks) hoard money, because the risks of doing anything else with it outweigh the (tiny) potential return. That's a "trap" because it means the Fed's two tools for stimulating the economy -- lowering interest rates and putting more money into circulation -- don't work. Rates can't go below zero, and any new money put into circulation just gets hoarded rather than being lent, invested, or spent. Japan got down in this neighborhood in the 1990s, and it was bad news. We're not there yet, but it's a sobering possibility.
- Nobody has bought my house! This one's my problem, but it's a symptom of a larger one. My house -- well-maintained, beautiful yard, great neighborhood, desirable community -- has been on the market since April. We've had probably a hundred showings. We've dropped the price some 15% from a level that seemed like a bargain just a few months ago. But nobody has bought it, and our realtor says that's the market right now -- there are a lot of people looking, but many are waiting for the other economic shoe to drop before they make an offer. To which I say, "Market timing is a fool's game! Buy now!" But so far, no sale.
- The dollar's rise. In recent weeks the U.S. dollar has been rising in value against most other currencies -- save the yen, which is also rising. In some ways this is a good sign -- it's reassuring that the U.S. is still seen as a safe financial haven, and imported goods (including things like oil) and overseas vacations are suddenly more affordable, unless you're going to Japan. On the other hand, it makes exports a challenge. If the trend continues, it could be rough news for U.S.-based exporters like Intel (Nasdaq: INTC ) and Boeing (NYSE: BA ) , as well as other multinationals like McDonald's (NYSE: MCD ) that get hurt when their overseas income is worth fewer dollars.
I could go on and on -- the ongoing dance between Cerberus and General Motors (NYSE: GM ) , the continuing money drain at American International Group (NYSE: AIG ) , the coming crises in credit cards and auto loans, which got securitized in some of the same ways mortgages did and are seeing rising levels of defaults … the list is long right now. But it could be worse -- at least we'll be done with those annoying campaign ads in a few more days!
To read more about current troubles in the global economy -- and ways to protect yourself and take advantage: