Oscillating Around the Flatline of 9,100: The Dow Considered

The Dow appears to be oscillating around a number close to 9,100, and since I'm not Nostradamus (although I've seen his birth house in St. Remy, South of France), I wonder why this number should be so close to my prediction quite a few months back. First, the Buddhist Question: what is the Dow? (Ugh, lousy pun, as Stan Freberg has Tonto say in his classic send-up, "The Lone Psychiatrist.")

"To calculate the DJIA, the sum of the prices of all 30 stocks is divided by a divisor, the DJIA divisor. The divisor is adjusted in case of splits, spinoffs or similar structural changes, to ensure that such events do not in themselves alter the numerical value of the DJIA. The initial divisor was the number of component companies, so that the DJIA was at first a simple arithmetic average; the present divisor, after many adjustments, is less than one (meaning the index is actually larger than the sum of the prices of the components). That is:

."

Deeply satisfying, isn't it, to understand something down to fine-grain detail? Especially when there's a sigma sign and everything. The stocks in the Dow are the powerhouses of the American economy such as Microsoft (which, paradoxically, is traded on the NASDAQ), McDonald's, Bank of America, JP Morgan, United Technologies, Home Depot, Fed Ex, etc. Just think of the advertisers for the Super Bowl and you'll come close. So while there isn't quite the congruence of an index such as the Wilshire 5000, which includes practically all stocks for which a public market exists in the USA, the Dow tends to reflect the fortunes of the overall business world to a fairly accurate degree. It's not really an aggregation of "industrial" companies anymore, since the U.S. isn't an industrial country. But nice for old times sake to include the adjective in the name.

The Dow is famous for "pricing in" future trends; thus, the stock market is way ahead of the general "real" economy. The street-smart guys who know all the angles (viz., Woody Allen: "Manhattan") can see a recession coming from a mile away. So the shills on CNBC, for example, who sit patiently waiting for the big turnaround, wondering if this is the day the Dow will soar back up to 14,000, are just the sidewalk barkers for the girly show inside. They're trying to get you to put your money back in so the street-smart guys can play some more games with your capital. The distasteful alternative is to put their own money in, and they know that's a fool's errand.

So what I think is that the convergence between my guess and what's actually happening is that the Masters of the Universe (viz., Tom Wolfe: "The Bonfire of the Vanities") run much more complicated algorithms and models of the economy, but that the values and variables they use tend to aggregate in the same general direction as my more simplistic approach of saying that an economy which relies on consumer spending for 70% of its action will fall 35% if half the money available for spending is taken out of the market. That is to say, if Americans have to rely on their actual wages and earnings, as opposed to borrowing against appreciating capital (the housing stock), we're in deep trouble.

For that reason, it occurred to me that the so-called "subprime crisis," as an explanatory thesis, was a case of putting the cart before the horse. The economy did not tank because a lot of people were defaulting on subprime mortgages which backed mortgage-bundled securities. The economy tanked because we had reached the point in our colossally over-leveraged lives where the ability to own a shelter or to maintain the lifestyle propping up the frenzied consumer economy could not be sustained. This is a subtle difference, but it shifts the locus of responsibility dramatically. The "subprime crisis" was simply the last gasp of Consumerism, the final gimmick to keep the whole thing going for a while longer.

The chart in the upper left tracks the profligate ways of America over the last 50 years. The Greatest Generation did things somewhat differently; they saved money, bought modest houses, lived within their means. In 1957 (in constant dollars) the per-person load of total U.S. debt was about $30,000. That included the national debt, state and local government debt, business debt, total household debt. This last figure (mortgages, accounts payable, auto loans, credit cards) was a manageable 40% of total national income or GDP. There was excess cash, in other words, providing a pool of capital. Look at that trend line for 2007 for the same metric (blue line): total household debt now soars above 120% of total gross domestic product. We're in hock up to our eyeballs.

There you have the gist of the story. I think what happened over the last thirty years or so is that American political leadership simply got bought off by lobbyists, many hired by industry groups in that same Dow club. They were making good money keeping things as they were. No one proposed any sort of "radical" new paradigm for energy usage, habitation, agriculture, environmental policy, or any alteration in the basic premise of the economy: America as a patchwork of suburban developments situated between strip malls, big box stores and fast food joints, with everything accessed by outlandishly huge private autos. One president, Jimmy Carter, made noises about a serious change in energy usage and got thrown out of office. There were plenty of voices as long ago as three decades who were sounding consistent warnings about where all this would end up. Barry Commoner, for one, and Wendell Berry and David Brower. Yet the levers of power were owned by Big Business reps and oil men, like George W. Bush and Dick Cheney, and even the "populist" president, Clinton, received his economic input from Wall Street mavens like Robert Rubin of Goldman Sachs. Their fortunes were invested in the status quo ante. Gasoline, oil, natural gas, coal, defense spending and gargantuan waste, a nation where 5% of the world's population used 25% of all energy. All of it was a demonstration of the normative tendency of the factual: whatever has come to be seen as the dominant paradigm achieves an inertia that is almost impossible to budge without a crisis that demands adaptation.

And so now we have it. Characterizing our problems as a blip, a brief "discontinuity" caused by the "subprime meltdown" is, to my way of thinking, a ridiculously off-tune diddy we whistle as we pass the graveyard. Naturally, Chairman Bush, as he nervously stands at the podium for another in an endless series of hortatory sermons about the crisis, tells his little morality tale about how there were loans once that got put into bonds and the bonds went bad and the economy went splat. In his uncomprehending eyes and scared little boy face you can see he doesn't know whether he should believe it or not. He shouldn't and neither should you. Remember there was a long spell between the Crash of 1929 and the bank runs of 1932, which really brought on the depths of the Depression. The Dow, then as now, priced in the future. The future, as Chairman Bush would remind us in one of his fortune cookie moments, is still ahead of us.