Archive for October, 2008

Market Problems

October 16, 2008

The question of the month is where are the markets going from here.  No one really knows, but I will hazard a quick set of possibilities.  My basic theory is that we have seen a series of market “bubbles” where those with enough money to loose, have put their money first in technology starting about December 6, 1994.  The DOW was at a 2886 that day.  That is relatively close to the closing low of 2858 on March 22, 1991.  From there the market moved up.  The next significant correction was on September 11, 1998 when the DOW fell to 7795.  From there the markets moved up into the serious part of the technology bubble.  The bottom of the next major correction occurred on October 4, 2002 when the DOW fell to 7528.  This ignores the drop in 2001 which may be primarily the result of fears related to terrorism.

Perhaps these trends indicate value in a bubble is NEVER actually there, and markets will find a floor near their pre bubble low.  One could thus speculate that the current collapse of the financial bubble will find a low near the DOW 7500.  There are trends which suggest inter day dips in the current market tend to be indicators of later closing levels.  Perhaps they are the closest thing to an indicator of actual value existing in the current market.  The current fifty-two week low was on October 10, 2008.  That low is relatively close to the low of 7528 before the financial bubble.  It is possible that October 10, 2008 low is the bottom, but somehow I feel that is unlikely.  I would look for a second dip to that level, or below, to indicate the true bottom has been found.

The technology bubble may have actually started much earlier, in the mid-1980’s. The internet bubble, may have actually been part of a larger technology bubble, which began in the mid 1980’s.  We may be looking at a simultaneous collapse of several bubbles, which could take us either back to the 1994, or perhaps 1985 market levels. If this is actually the case, the markets have a long way to go down. There is some evidence which might point to that. Consider the price of a two liter bottle of soda. The price today is not more than it was in 1984. Same with a bar of soap, and perhaps most of the stuff we use day to day.  If you remove fuel surcharges, the cost of most consumer items might actually be about the same as they were twenty years ago.  The exceptions to this of course are fuel, education, housing, medical expenses, and transportation. If you exclude these items from price, average prices over several years are relatively flat, back to at least the early 1980’s. Certain items are significantly cheaper than in the 1980’s – technology – in particular.  A good personal computer system in the late 1980’s was several thousand dollars. A good system today is far less expensive.

While wages are not completely flat, employers have given raises of five percent or less, for approximately twenty years now. We have a situation where housing prices are in collapse, new automobiles are not selling, a barrel of oil is half what it was three months ago, students are dropping out of college as loans approach the cost of a mortgage, the US has a backlog of used cars, and dealers are going under everywhere. The internet university will shortly displace traditional classrooms, significantly lowering education costs. The “Open Source University” promises to eliminate the traditional cost of an education.

Medical costs are the one thing which has not collapsed. Much of that is due to the loans a physician must take on to finance his education.  Some of this cost is due to the effect of medical insurance holding prices improbably high. By some estimates, eighty percent (80%) of the cost of an office visit is related to dealing with insurance. As the number of insured patients declines – as it will during a major recession, doctors who insist on medical insurance will find themselves raising prices on a dwindling pool of patients. Doctors who skip the insurance hassle and charge more reasonable fees will have more patients and may scale back fees. As technology invades the delivery of medical care, nurse practitioner clinics will become more available simply because there will not be enough doctors. As the number of these clinics increase competition will lower the costs of basic easily deliverable medical services. Collapsing commercial real estate prices will also make medical office space less expensive which will eventually have a downward effect on the cost of medical services.

Given all of these factors, with the wholesale relocation of most well paying jobs out of the US, I would imagine it is fairly near probable that the DOW could move to 1994 levels.  If the underlying system of loans and finance which support today’s pricing structures should collapse, the DOW might find itself back at 1984 levels.  This would of course be a catastrophic event for US investors, but the ongoing bubbles have extracted catastrophic costs on the average US family, so Wall Street isn’t going to get a lot of sympthy.