Explaining the Stock Market Sell-Off

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Still, stagflation became a reality for one simple reason: when the market drops and it is not allowed to hit rock bottom, capital waits it out.  Think about this in your daily life.  If you know that the supermarket is artificially inflating the price of Corn Flakes – and if you can survive without Corn Flakes for a week –the price will go down.  In the book market, we see this all the time: people wait for the paperback to come out so that they don’t have to spend quite so much on the hardcover.

The same principle holds true in real estate or investment finance.  If the government keeps bad borrowers in their houses, the supply of available housing is artificially low.  That keeps prices up.  Smart investors wait until those bad borrowers go bankrupt, and then they buy.  That’s also true in the investment market: why invest in new workers if you know that their price is being artificially stimulated by government subsidies?  Eventually those subsidies will go away, and the price will go down for labor again.

So why was the stock market so high this year?  Because the inflation in the currency caused people to run to invest in other commodities that would move up and down with the tides of the currency.

And why is the stock market now tanking?  Because with the stagnant GDP – we are now in a minute or even negative growth period – people have no faith that companies will find a ready market for their goods.  The assumption was that stagflation would not occur.  Now the market knows that is wrong.

My good friend Bob Bonelli is a top finance guru.  I discussed this situation with him at length this week.  As he pointed out to me, in order to reduce the real unemployment rate 1%, GDP would have to grow 5% for the full year.  That can’t happen with the current system of governance.  Bob also told me he’d received a tweet from a follower this week: “Bob, can President Obama solve this economy with a speech?”  Bob tweeted back: “Actually, a short speech would do it: ‘I am leaving office today!’”

Bob is right.  If we want to know why the stock market dropped last week, all we have to do is look to the White House, where President Obama is busy eating burgers and partying with his Hollywood hip hop buddies.  If he really wants to serve the country, he can just get out of the way.

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  • Amused

    Standard and Poors stated quite clearly their reason for the downgrade- bipartisan bickering , and the sickening display of brinkmanship . They warned about it , and the politicians nonetheless proceeded on their self destructive course .Lack of compromise , intransigence , contentiousness , to such a deree that the confidence on solving the debt crisis looks bleak .And now after that financial blow , the fingerpinting continues . Now Moodys is considering a downgrade . And after all , these rating agencies , see the same thing the American people have been seeing of these bums in Washington , whose only purpose it seems is to denigrate each other and put forward their own political agendas BEFORE the greater good of the United States . 82% of Americans agree with that assessment , and consider the "job " politicos are doing is a DISGRACE .Hope you're all satisfied , there will be no winners in this game .

    • aspacia

      S & P also backed the subprime mortgage market. I do not trust them.

    • tagalog

      I don't have a lot of regard for Standard and Poor's either, but they also made it very clear that they were gauging the credit rating of the United States on Congress controlling the cost of social welfare programs, specifically Medicare. So S&P's were concerned with spending cuts and not tax increases.

    • aharris

      They clearly stated they wanted at least a 4 trillion dollar cut up front. That didn't happen, and we know who can't stomach the thought of spending less.

  • E. H

    I am an affluent person over 70 with no pension who luckily can continue working part time.
    My Con Edison bill has gone fom 220 to 330 per month. on an annualized basis. My fuel from 375? to 475? approximately 1/3 more per month.
    These are basic expenses which I can pay.
    I agree with John Crudele, nypost business columnist that the statistics on inflation are total misrepresentations of what is actually happen. Just wait till the government acknowledges what is happening, and then a crises will arise.

    • aspacia

      Obama fulfills a campaign promise of increased electricity costs.

    • aharris

      Shop for groceries with a clear budget and calculator every week and you know the inflation stats are BS.

  • tanstaafl

    Obamacare needs to be rescinded. But Obama will never agree to it. The election of 2012 is critical.

    • Jim_C

      We were never going to be able to afford health care before "Obamacare." And we've known this, literally, for decades.

      So what did anyone do about it? Well, Nixon tried (essentially Obamacare) and Congress shot it down. Then Hillary tried, and Congress shot it down. When did anyone else EVEN TRY??

      Some Republicans did try–their plans, unfortunately, looked too much like Obamacare for their party leadership's comfort.

      I tend to think it's too watered down to be useful, myself. At least kids and pre-existing conditions can get care, now. But until your side gets serious, and out from under the wings of insurance and pharma, we're screwed. Every other country has this figured out–why can't we?

      • Sound&Fury

        The problem isn't, as you say, an incestuous relationship with big Pharma. When nodiscretionary spending for Social Security, Medicare & Medicaid comprise 57% of the federal budget before even talkikng about Obamacare, THAT's the problem.

      • tanstaafl

        Don't assume I'm a Republican.

        You won't like my idea.

        No government program should be only available to small minority. I propose that the government end Medicare & Medicaid and purchase catastrophic health insurance for the entire population. Very high deductible – $10,000 to 15,000.

        Private insurance could cover the deductible. I know what you're going to say – not everyone has money for the deductible – that, however, is easier than going bankrupt.
        Besides, I have a way to solve that problem.

      • aharris

        You likely won't like my solution either.

        Buy catastrophic health insurance for a person at birth (or even conception). That policy follows them like a life insurance policy and covers traumatic care and catastrophic illness. A person would also be able to purchase riders to add to that policy for coverage of chronic conditions.

        Everything else would be covered out of pocket. Routine checkup? Out of pocket. Broken arm? Out of pocket – even the x-rays. No middle man between you and your health care provider. You can expand the HSA programs for this purpose.

      • Jim_C

        I would do it this way: everyone HAS to purchase insurance from a private company; government pays for anything over something like 7% of your income. Insurance companies cannot profit on this basic plan. But they can offer supplementary products for profit and compete in that realm.

        Consider: If the government subsidzes anything over 7%, that means that they've agreed on a goal that health care should essentially cost around 7% of GDP, which is on the high side of per capita health care costs in most of the developed world.

        And HALF what our current average is!

  • Cuban Refugee

    Alinsky, Marx, Mao and Cloward howl with delight from the flames of hell, while the reptilian monster George Soros and the evil witch Frances Fox Piven laugh up their malodorous sleeves. Whoever says that Barack Hussein Obama is a failure has no idea that he performed his mission to the letter: to effect the destruction of the greatest country the world has ever known in order to institute a socialist global government. Congratulations, Barry, you have come a long way from your Indonesian madrassa and your Marxist parents, associations, and mentors, but your early learning has served you well in the demolition of our republic. You and your coterie of '60's radicals and malcontents eventually will join the rest of the malevolent actors in this tragedy who have passed on, but you will be unable to deceive your way through the Final Judgment.

    • EOwens

      This sounds like someone is finally getting the picture. I hope enough people are awaken to reverse the course of our nation.

  • MBA NJ

    Obama, the usurper and puppet, has done his role of helping weaken our Constitutional Republic and the irony is that when he is finally legally deposed ideally by impeachment for crimes of treason, some folks will whine that we should leave things as they are, out of laziness. What the corpulent contented selfish and short sighted folks don't realize is that any short term benefits were done as he mortgaged our future.

    • Jim_C

      You can't possibly have a real MBA, can you?

  • mike B

    Give the Obamessiah some credit. He is making progress. He blamed the tsunami and Arab Spring before he got around to blaming "my predecessor." This is a step in the right direction. </sarcasm off>

  • Amused

    just as it was in mid-evil times , the ignorant need a devil to blame . people haven't changed much , only in that they have more sophisticated means at their disposal .your error herte , which will propel Ob ama into a second term , is that you chose to allow idiots to take control of the republican party .no matter what you say , the republican party is going to take the hit for whatever the ultimate consequences of the rating downgrade may be .you can cut spending all you like , the US will not climb out the whole without raising revenues , and THAT is not a matter of "if " , but only "when " . so play your games, spew your contentious rhetoric , put your heads in the sand and blame the other side …..if that supports your delusions .

    • Eowens

      The problem with raising revenue is that the people in charge at this point will not use the new revenue to benefit the nation but only to due further damage. You have to understand that they are using money to destroy us. Don't give more gas to the arsonist.

  • tagalog

    Yes, idiots did take control of the Republican Party. So now the battle lines are drawn between the idiots and the crazies.

    Idiots can be taught, but crazy people are just crazy. So I go with the idiots because they have some potential.

    • trickyblain

      lol, that's about where I see it, too. Only I see the Republicans as crazy idiots, while dems are crazy dreamers.

      Don't really agree that idiots can be taught, though. Like that comedian (name escapes me) says, "you can't fix stupid."

      • Jim_C

        I would call the dems "sane p*ssies."

        • trickyblain

          You're probably right, on a federal level. I must have been thinking about the lege of my home state, California.

  • Alpha Dog

    What are you going to do to fight voter fraud? Why does it take so long to shut down ACORN? That's why Obama will win. Can your facts and studies. By hook or crook, or Chicago campaign management, he's taking over the world.

  • Amused

    OMIGOSH …THE WHOLE WORLD !!!! BWWWWAAAAAAAA!!!!! Run for cover Alpha Doggy ! On the way get some more prozac .

  • Amused

    In the meantime , lets see how far down the Teabaggers can bring the market Everyone will remeber them come election days , and their republican cohorts . All you need now to guarantee a democrat for next POTUS is run batsheet crazy Bachman .

  • Sound&Fury

    Today Obama is asking himself, what would Fidel do?

  • Amused

    Oh yea , I'm sure that's precisely what he 's thinking . Man you must be a clairvoyant !

  • GKC

    Revenue Enhanced Enough Already, there Amused. Maybe you just need a mandible displacement.

  • http://www.moneyteachers.org/StockMarketForSuckers.htm Craig

    Behind the expensive suits and the talking heads and the constant reassurances there is a simple truth. The Stock Market is and has always been a suckers game!

    Consider the following:

    1. The S&P 500 is a big barrel of money. When the money gets to a certain level, the Psychopaths drain it off. In order to get it to a certain level, you have to buy the B.S. and turn your life savings over to them.

    2. Only a few insiders actually buy and sell stocks. These institutional investors and market makers bring the market down by selling stock into the market.

    3. The S&P 500 represents 75 cents of every dollar invested in the stock market. That means 500 company stocks to sell when they want the market to crash. Not that hard to accomplish when you think about it.

    4. The other branch of the Satanic Psychopaths catch all that falling money buy buying Put Options against the S&P. AS the S&P goes down, they are capturing all of that lost wealth.

    5. My Clients have made anywhere from 20-50% returns over the last week by also shorting the stock market. One client made $2400 profit from a $3500 investment. Can your stock broker do that? If so, why aren't they doing it? Instead, they are standing idly by while you lose money!