This week the Dow Jones Industrial Average reached and slightly exceeded 10,000, closing two straight days above it. What will it really mean?
First and foremost, we must remember that when it reached 10,000 for the first time in 1999, it heralded several rather flat years, with ups and downs that centered around that achievement. It wasn’t until 2005 that the Dow really began a true run upwards again, reaching more than 14,000 in October 2007.
But as they say, what goes up… must come down and we have to remember in our exhaltations of “Dow Ten Thousand” that when the market came down in 2009, it very quickly passed 10,000 on a meteoric decline to near 6,400. The same could very easily happen again.
In fact, if you adjust backwards for both inflation and GDP growth to 1929, just prior to the October 29th crash that year, the Dow was at an all time high in what was at the time, recognized as a recession. People, including economists had predicted then, as they are now, that the recession was over, but it really wasn’t.
Economic forecasting is often based on patterns for key statistics, but economies don’t work on the exclusivity of those figures. They work on a number of other, more complex factors and too frequently economists fail to put the overall picture together, which explains why so many of them make incorrect predictions and issue forecasts that make the weatherman look far more accurate.
At present, while the Dow is by everyone’s admission, on a euphoric high, certain factors are at work preparing to offset any positive impact the 10,000 figure may have. Among these are extremely tight credit for small to mid-sized businesses; predictions that around 500 to 1,000 banks will fail by 2011; continued tight credit for property development and in 3 out of 7 major companies, negative sales and revenue even though 6 out of 7 report a positve bottom line.
Unemployment remains high and is expected by most economists to remain at or above 10% for two to five years. The worst part of that are those who fall off the unemployment rolls still unemployed. Those people will become a major issue for the overall chance of economic growth as they will not be able to spend, nor contribute to positive GDP. Rather, many of them will be compelled to turn to government sources for healthcare, food and other social benefits, increasing exponentially, the national deficit.
Bankruptcies are on the rise, not merely on the personal level, but among small businesses, with too many of the latter defaulting on their payments to creditors. This has a cascading effect that hurts the chances for business growth. As one business defaults on payments to three suppliers, they in turn default to their suppliers and so on, with the impact that few will want to start new businesses to replace those which failed. Storefronts and small offices will remain empty, and new jobs, which small businesses usually create more of than large businesses, will be negative.
With the Dow hovering at 10,000 once more, we are concerned by the grave risk that it can, and will take a tumble again. A Wall Street Journal Op-Ed today blamed House Financial Services Committee Chairman Barney Frank (D-MA) and the government, overall, for helping to exacerbate the crisis, and for failing to implement true reforms. We sincerely doubt that Chairman Frank is to blame. This crisis is one that is of a global, systemic nature and no single individual can truly be blamed, which is what we’ve said for a long time.
In fact though, government is failing to see the overall context of the systemic risk and today, we are, as a nation and as an economy, no better off than we were in September 2008, despite more than $23.6 Trillion being injected into the system.
The time is come not for new regulations out of Washington, but for new approaches to systems, and for the means of identifying risks before they become problematic to the overall financial system.