The stock market spiral. It may not be what you are being told

Stock market downturn august 2011

The broadcast media loves a good, tight narrative. Here is the narrative for the stock market downturn for the recent events happening on Wall Street.

Congress squabbles over debt ceiling, Tea Party was obstinate about debt and deficit, we came close to default, S&P drops rating, stock market reacts. Package that up with some pundits, repeat over and over and it becomes fact. Next story.

Only part of this is true.

Here is what I think is happening with the stock market. It is about as simple as the narrative, but admits that human behavior is behind all the numbers so that is always scary territory for economists. But we’ll give it a go anyway.

In 2008, the economy came to a grinding halt. Millions of people lost their jobs, many were on their way to losing their homes and since poor people don’t spend money, millions of businesses quit stocking inventories.

Corporations shed jobs and cut expenses and immediately became more productive and profitable just in the way we measure these things. When the economy started growing slowly, they did not re-hire people; they replaced them with technology that shows up every day, do not need a medical plan and will never saddle the corporation with a pension plan. Investors like that so they buy more of that company’s stock. And they bought a lot in the past two years, pushing stock prices higher. Investors were getting richer.

But you can not cut your way to long-term profitability. The life span of a “cost-cutting to profitability” plan is about 18-24 months. After that, if you are not growing revenues, your profitability will start to decline. Business knows that but they also know that the average “dip” between recessions is about 18-24 months. After that, people get tired of austerity, they start spending, jobs get created and the economy kick-starts itself into gear.

Investors also know this, but they never know exactly when they should be selling the stock. But the smart ones know they will sell the stock eventually because companies will start hiring based on product/service demand and their stocks will take a hit before going back up. Investors hate when companies hire; it means lower short-term profitability and long-term obligations. They like to sell before that “hit” happens.

The underlying reason businesses are not hiring is because they have no need to hire. There are few customers on the horizon. Regardless of what the GOP spins about tax cuts and regulations, the number one — and only reason — businesses are not hiring is because they do not see any customers. Period.

Taxes and regulations are things to either comply with or figure out how to get around when you really, really want to get to the dollars on the other side. To date, I have not met a businessperson who does not believe that in his/her heart. Have you?

We are at about the 24 month mark when the economy should be swinging upward. Only it isn’t and the only organization with the will and means to spend money to get things kick-started — the US Federal Government — is now in a Tea Party-forced cost-cutting frenzy. Even if the President were to introduce a jobs bill, he could never get it funded. What the market heard during the debt ceiling debate and Mitch McConnell’s comments afterwards is the government is going to keep cutting way past the 18-24 month window. Way, way, way past.

“Holy crap!” think investors who are looking at history and know they are at or near the end of the “cost-cutting to profitability” plan of most corporations. “I’m not going to lose my butt in the private sector. I’m going to buy the most secure stuff that exists; US Treasuries.”

Standard & Poor’s did the only thing they knew how to do; lowered the rating for the US Government. Not entirely the best strategy, but they could do little else. S&P also gave a narrative as to why they did something, anything. But neither side heard the rationale. I’m not a fan of S&P as they have been wrong more often than right, but this time, I think they got it right, even if their math was off.

The problem does not lie in the math; it lies in the human assumptions behind the math.

And that is exactly what is going on, regardless of what rating Standard & Poor’s gives the US Government.

Now, all we need to do is package that in a nine-second sound byte.

*Sigh*

I sure do miss the smell of horse dung

typical white christian American family

Last year, an acquaintance who has a part-time firefighter job, supplemented by a full-time ambulance driver job with no health benefits had to go to the emergency room with asthma complications. The hospital ended up having to admit him for three days. The total cost of this unplanned vacation was $23,000 and some change.

He had no insurance and he did not have $23,000. He applied for Medicaid, went through some hearings, some denials, appeals and eventually Medicaid paid the bill.

He is a Republican through and through. When asked how he liked his socialist benefits provided by his government, he smiled sheepishly and looked away. He was caught in a lie and he and I both knew it. He is still a Republican. Having his medical bills paid for through no personal merit or responsibility did not change his mind one bit about his political loyalties or the argument for his loyalties.

And that is when it hit me solidly: The GOP is not about fiscal responsibility. They are entirely about social issues.

A little background
My friend was raised in the rural parts of Ohio, right outside my town of Englewood which is ten miles north of Dayton, sixty-five miles north of Cincinnati. So he wasn’t actually raised out on the farm, but enough where there is little if any diversity and no weird artsy-fartsy types with book-leraning and such. The men hunt every fall, fish in the summer, drink beer, watch football and chew tobacco. And the women tend to their men. And everybody goes to church on Sunday and if they don’t, they still believe in Jesus Christ. (Really, these places exist not too far out your front door, wherever in America you are.)

And this is also where they talk openly about “how in the hell we let a g*d**n n****r in the White House” right before they spit chew violently on the ground in disgust.

How we got here
The GOP has gotten its followers to believe and say there is a finite amount of money available and that your ne’er-do-well, slacker neighbors are taking your fair share of your hard-earned money. Only it’s not really true. It’s not what they really mean when they say “money.” Money is just code for “my white Christian culture.”

The Greatest Generation were better storytellers than they were social engineers. When the men went off to war, they brought back stories of valor, courage, bravery, camaraderie and honor. My grandfather never talked much about the War. My dad never talked about the Korean War either. All we had were photos, medals and a few stories of good times with their buddies. They never talked about the horror of seeing their friends die or body parts getting blown off. When they came home, they put the past behind them and created a narrative that was peaceful and prosperous, even though it was not the truth.

Women who went off to work in the factories did much the same thing. It was hard, back-breaking, grueling, greasy, filthy work but when it was over, it was over. They did not tell stories of workplace accidents, the long days and the restless nights. They spun yarns of achievement, honor and patriotism.

And three generations later, that is how we remember the past that never was. Families lived in harmonious, quiet neighborhoods with houses all lined up on clean streets. The dad went off to work, the mom stayed home and kept house. There were regular raises and good benefits at his job. The kids played baseball, went to school and played stickball in the middle of the street. When they grew older, the kids went out on dates, got married and had kids of their own.

Each year, the family would get together and have Thanksgiving dinner, then Christmas and celebrate Easter in the spring. There would be great news of babies and marriages and of course of deaths and funerals. Everyone married a virgin, everyone died at peace. This all played out like some great movie with a well-crafted script. There were things nobody talked about and everybody knew what those things were.

And the children forgot about the struggle the previous generations went through to build this Great Lie. The storytellers of television and the movies gladly filled in the gaps, fueling an even more memorable past that never was.

The Great Lie of our American Dream is even embedded into our future. The following is a video made by Corning. The cues of the Dream are embedded everywhere across generations. Take a look. Can you see them? Do you find yourself wanting to be there? It’s a powerful Dream.

The past is knowable and comfortable. The future is scary. I’m fairly certain in a generation back there were old men who sighed wistfully as a truck blowing smoke passed them by on a farm road. Sure do miss the smell of horse dung, they might be thinking.

Money as a mask
We use price as an excuse for almost every human behavior. If we don’t really want to buy something, we say “that costs too much” or “I don’t have the money right now.” When we really want something, we find a way to get it by charging it, putting it on layaway, leasing it or in the case of a house, commit to mortgage terms that are not in our financial best interest. We rationalize a debt to get the things that we really want.

The GOP understands this about human nature — and particularly the American culture — very well and has masterfully crafted its message around money. “The state is broke,” they rail when a program is funding issues that are contrary to the Great Lie. “Our country is going bankrupt!” “Limited government” and “Take back our country” are all very attractive catch phrases for a population that has been led to believe that the supply of money is finite and being spent irresponsibly by your drunken neighbor. After all, many of these people don’t have much left from their paychecks at the end of the week, so it all makes common sense.

Everything the GOP wants to do is masked as a money issue because they know that American culture understands money. All this other stuff about happiness and rights and liberty is so hard to quantify. But money is easy. You can count money.

The inconsistency is the key
The key to understanding why money and fiscal responsibility is not the real issue is the inconsistency between what a conservative says and what he does. He will take a Medicaid handout to keep from paying a $23,000 hospital bill. He will take a government-supplied paycheck as a firefighter. He will take a home interest deduction on his taxes, a Pell grant from the Federal government, drive on the freeway system without paying a toll, attend a public school and do all these things as if it were his right to do so all the while saying we need less government. Taxes pay for all these things that give him a standard of living yet he perceives to have gotten these things through his own hard work and initiative.

And my favorite inconsistency of all, “Keep your government hands of my Medicare.”

The GOP knows that if they keep the discussion framed as “fiscal responsibility,” they don’t have to address all those other messy issues that go along with promoting the Great American Dream that never was. All they need do is step back in shock about why someone would not want to be fiscally responsible and they win the argument. Only the argument never really was about money. It never will be.

What’s in it for the GOP?
Power, I imagine. I can’t think of any other reason why someone would care more about the state budget being balanced than the health of their own household. Maybe some of these politicians really believe the rhetoric about fiscal responsibility, but I doubt many retain it. I think most of them are angry that not only have they lost their birthright, but it was stolen from them. They see political office as a way to take it back.

The GOP may have been about fiscal responsibility at some point in their distant past, but I think they have always been more about preserving the American Culture. As they become more and more desperate about preserving the Dream, the more they are letting their mask fall away. But judging from my friend above, they may think they can now afford to do it and start being honest about who they really are. Apparently lying about their true intent bears no consequence as at least half the country is one of them.

Am I off the mark here?