I’m not generally much of a big financial markets guy, not a stock market speculator, nor do I spend a ton of time looking at the Wall St. financial media. I say all this before I begin because, well, I want my own limitations here to be up front. That’s not to say I don’t have money in the market or that I don’t trade stocks myself, but the total value of the stocks I have directly purchased (as opposed to mutual funds or other managed investments) is, oh, about $2500. In other words, not much. Again, something to keep in mind.
Being the kind of person I am, though, I keep an eye on my $2500 like a hawk and have noticed my Yahoo Stock Widget looking like this a lot in the past few weeks:
Here is the month of July and August so far for the Dow:
The last two weeks have been brutal, to say the least. Compared to the beginning of July, though, it’s hard to see if this is telling of anything.
Obviously, there have been major events in the financial sector to prompt this kind of selloff. The key events have been the troubles faced by Bear Stearns and (more ominous to me) the issues with American Home Mortgage. The underlying thread in both stories is the value of American mortgages and the debt level in the U.S. While I can’t explain it perfectly, the problem is that a lot of financial activity, from hedge funds to consumer spending, relies on home prices and housing value. This debt has itself becomes an investment for some players and for whatever reasons (falling home prices, concerns about national debt, etc.), a lot of investors in mortgages are pulling out. The Times has more on the interrelationships here. Also, Marc Andreessen, of Netscape fame, posted a letter from a hedge fund manager explaining why their fund was selling off.
So, what does this all mean? I don’t have any answers, just that I’m uncomfortable about the market right now. I’m also uncomfortable about the level of debt this country is taking on, both at the household level as well as at the federal level. The political observer in me is even more concerned with the spending spree that Congress and the Bush administration have been on. The Vice chairman for Goldman Sachs, Robert Hormats, just testified before the House Budget Committee about the state of America’s credit rating and fiscal balance sheet. From the article:
Hormats was being much too diplomatic in summing up his warning to the House Budget Committee: “If government debt continues to pile up, deficits rise to stratospheric levels and heavy dependence on foreign capital grows, borrowing the money will be very costly. If America remains on its dangerous financial course Hamilton’s gift to the nation — the blessing of sound financing — will be squandered.”
The truth is, America’s leaders have already squandered “Hamilton’s gift,” and along with it, more than two centuries of experience, replacing it with a new “faith-based” policy: “Deficits don’t matter.”
No wonder Main Street Americans have a “gut instinct” that we’re a disaster waiting to happen. Not only are we “transferring an inordinate burden to future generations,” says Hormats, Washington’s undisciplined spending and total lack of a financial repayment plan is undercutting our national security and exposing America to the worst-case scenario: Another domestic terrorist attack that would trigger a “massive disruption of our economy” and a meltdown of America’s credit rating throughout the world.
That generally jives with my sense of the world today. Too much of our spending and lifestyle is supported by folks like the Chinese, Japan, and OPEC nations continuing to accept bonds in the place of hard currency we don’t have. We are, in essence, borrowing the money from them to pay off our budget deficit plus our overall trade deficit. That can’t be a “strong” position to remain in for long, regardless of how strong our nation appears to be.*
For what it’s worth, I should mention what triggered this reading frenzy this afternoon. I found a clip of Jim Cramer (of Mad Money fame) losing it on a CNBC interview (video is below) which lead me to a number of different articles on the topic. Among the interesting finds are an article at iTulip.com covering the same ground as I have above with smarter people, and some interesting thoughts and comments here. The iTulip folks are particularly pessimistic, but the arguments they raise are interesting on their face.
Of course, I’m not the only American feeling this way. A recent WSJ/NBC News poll found that “More than two-thirds of Americans believe the U.S. economy is either in recession now or will be in the next year.” That’s not great confidence, and I’m not sure how else to line that up with the uptick on venture investments and strength of Silicon Valley right now. Those areas don’t feel like 2000 at all to me, or else I wouldn’t have made my career change now.
So, ultimately, I don’t know what it means… just that I’m watching with open eyes, and thinking about getting out of my ARM in case there’s a sudden run in interest rates. I guess we’ll find out.
One last thought: I can’t imagine what it would’ve been like for the home buyers affected by AHM’s implosion. Imagine having closing scheduled, thinking you’ve either bought or sold your home, and then finding out that you actually don’t have a mortgage. For home-buyers with less than stellar credit, they’re also finding out that it’s harder to get a loan. I know that, at a macro level, having more stringent requirements for getting a mortgage is good for everyone. I just can’t imagine what the reversal would be like.
Finally, as promised, here’s Jim Cramers’ interview:
He really does just lose it completely. And that’s kinda scary. Especially when what he’s suggesting is claimed by many to have exacerbated the situation we’re in right now… Greenspan suggesting people get ARMs, people using low interest rates to jump into interest-only loans or other adjustable mortages with sick escalation clauses. This is going to be an interesting few years coming up. Obviously, the real question is whether I should pull my money of our stocks or not…
*There are counter indications on this front, and I don’t intend to reduce something complex to two sentences. I’m happy for anyone that might be able to share their insight or opinions on this in the comments.