Is the Stage Set for a Stock Market Crash in 2008?
The recent volatility in the stock market is a sign that a major correction is in store in 2008. Four trends will drive this correction: 1)the growing US trade deficit and the out-of-control national debt, 2) the subprime mortgage mess, 3) corporation mismanagement and resulting major losses, and 4)a giant shift in the way the global economy works and the failure of the US to understand or keep pace with this shift.
The Great Depression inspired FDIC insurance on bank deposits and other safeguards to prevent that specific kind of correction from ever happening again. We know why and how the Great Depression happened. But we can't protect ourselves from what we don't know and don't understand. Uncertainty is the bane of the stock market, and today, uncertainty is growing as fast as fossil fuels are shrinking.
THE SUBPRIME MORTGAGE MESS
The subprime mortgage mess is a symptom of a much greater underlying problem. Greed and short term profit have been coming before long term goals and responsible management for a long time in the US. While the news tends to focus on foreclosure and problems at the level of the individual, the larger problem is that the subprime loans made to these individuals were sold irresponsibly and often illegally, and then packaged into SIVs or "structured investment vehicles" that were sold to banks and investment firms as solid and profitable.
Once packaged this way, it became quickly impossible to identify where the subprime debt was located or who owned it, creating intense uncertainty in the market and causing what is now referred to as "the credit crunch." Banks are slow to loan money to other banks, because they can't be certain they will be paid back, because they don't know how heavily invested other banks are in these junk SIVs. When banks can't loan money to banks, they stop loaning money to people, and when banks stop loaning money to people, the economy grinds to a halt. In truth, no one is quite sure how to fix this, not even Alan Greenspan. This is new territory.
THE GROWING US TRADE DEFICIT
Ever since Reagan broke the air traffic controller's union and Clinton passed NAFTA, the US has been losing its industrial base at an alarming rate. But even more alarming is the recent trend to outsource customer service jobs, IT jobs, and other high-paying brainpower types of jobs to other countries. Even animation is now mostly being done in India because of the competitive pricing that corporate globalization triggered. When a country is not producing goods and services, and begins to instead just move money around, that country is in economic trouble.
CORPORATE MISMANAGEMENT
At my job, if I take too many bathroom breaks, I'm fired, but the head of Citigroup just lost the corporation FIFTEEN BILLION DOLLARS and retired with a multimillion dollar golden parachute. What is wrong with that equation? Are we in a Dickens novel or something? The US cannot sustain this kind of irresponsibility without consequence. Ford and GM ran the auto industry into the ground by refusing to change while only looking at short term profit, but it is the hourly workers who will pay, not management, and ultimately the whole country will pay. Without responsible management and shared longterm goals the US is destined to fail. The free market, which was supposed to cure all ills, got us into the mess we are currently in. The free market is not likely to get us out.
A SHIFT IN THE GLOBAL ECONOMY
The US is losing power on the world stage. Currently, the US is only able, barely, to keep up the interest payments on the mushrooming national debt. At some point, other countries will look at us and say to themselves, that's enough, we're putting our money elsewhere. Already OPEC has made some grumbling remarks about payment in Euros due to the falling dollar. What is most difficult about this situation is that even very brilliant minds do not know what is coming, because the current situation is a major historical shift, akin to the industrial revolution or even greater, and the US is hardly on the cutting edge.
I think the coming year will be very difficult. In what ways? I think we are about to find out.