The New York Stock Exchange on Wall St

The New York Stock Exchange on Wall St

As of the closing bell the Dow Jones Industrial Average is up almost 900 points to 9062.12, closing above 9,000 for the first time in a little over a week. Financial news organizations that were pessimistic in the extreme this morning (e.g. Paul Farrell’s piece and David Brooks’s editorial in the NY Times), and are ebullient this afternoon. What’s going on?

Many commentators (e.g. here) have pointed out that opnion still remains optimistic, even though the fundamentals are weak. That means hope is still motivating the market, and the majority of investors — retail investors — still think stocks are a good place to put your money. Meanwhile other investors, probably big institutional investors, are continuing to lower their exposure to risk. That means liquidating assests while they still have value. Big time fund managers know that stock only has value if the company hasn’t gone belly up. In a severe economic crisis (or after the popping of a bubble) that is exactly what happens to many companies. Who here remembers Webvan, or Pets.com? At one time their stock was soaring, but now it’s only good as wallpaper. Insiders don’t want to get stuck holding the bag on a losing company.

But no one knows exactly how bad it is. Even though asset values (company stock, inventory, commodities) have come crashing down around the world, they haven’t necessarily hit their pre-bubble lows — or have they? Could the massive intervention of governments across the globe have actually averted the crisis? I was feeling the schizophrenia myself last week, as you can see here and here. But we should be wary of wild stock market swings, either up or down, and we should definitely not confuse the number of the DJIA with a leading indicator of the global economy.

The global credit crisis is far more complicated than the numbers representing the value of stocks. As Margaret Atwood has pointed out in her new book Payback: Debt and the Shadow Side of Wealth, debt is a complex social phenomenon. Check it out. In a nutshell, until all the people who borrowed money they never intended to pay back (like Bush, Cheney, et al. who borrowed vast sums for a vanity war) have been forced to honor their debts we will not see equilibrium in business or the markets. And that may take quite a while. Moreover, we’re all responsible for the bill: Punishment of the sins of the fathers will be meted out to the fourth and fifth generation. You can bet on it.

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