Down The Tube

Posted November 20, 2008

The Dow Jones Industrial Average fell below 8,000 which is the lowest it has been since 2003. Investors are starting to question what is keeping the US dollar propped up.


The financial analysts are beginning to use terms like “lost and leaderless” when referring to financial markets.  In normal market conditions, investors respond to trends and not single announcements.  Right now they are responding wildly to any single piece of news which is causing radical swings.

On 19/November/2008, the Dow Jones Industrial Average fell by an astonishing 427.47 points to 7,997.28.  This is the first time the DJIA has seen anything below 8,000 since 2003.  This drop represented a 5.07% decline.  Other markets did not fare any better.  The NIKKEI dropped by 485.57 points to 7,787.65 and the FTSE dropped 202.87 points to 4,005.68.

The DJIA fell primarily because there is a new economic problem making an appearance, and it is not the auto industry.  The commercial real estate markets are beginning to see a rapid increase in defaults.  This market refers to the corporations owning hotels, office buildings and commercial land.  In conjunction with the commercial real estate market defaults, the financial segment and the retail segment are also plunging because of this additional exposure. 

Investors have rising fears that defaults are going to rise in commercially backed securities, so they began selling off equity holdings.  When you add the commercial default fears to the continued mortgage losses, there was no way the DJIA was going to remain intact.

As one savvy analyst so aptly put it….commercial real estate is following residential real estate “down the tube”.  That is a simplified way of saying that the economic picture in the US is getting worse all the time with a new problem rearing its head every day.   The commercial defaults headed the storyline yesterday, but only temporarily.  The auto industry is in deep trouble and begging the US Congress for an additional $25 billion loan package.

Congress, on the other hand, is telling the auto industry that giving them more money does not solve their most basic problems – poor management, union contracts with excessive wage rates, and the inability to compete with foreign auto makers.  But auto industries are in trouble in other parts of the world too.  The Chinese auto industry is asking for a bailout package from the Chinese government.

And don’t forget that other countries are still trying to find a modicum of balance to prevent complete financial collapse, much less a reversal of recessionary factors.  On 19/November/2008, the International Monetary Fund agree to give Iceland a $2.1 billion package to save its banking industry from collapse.  Other countries such as Poland and Russia are also stepping forward to help Iceland.

No one really knows exactly what is keeping the US dollar propped up.  It seems to be a combination of factors such as interest rates and bailout promises.  Yesterday, the dollar strengthened against the euro ($1.2589); the Canadian dollar ($.8011); the Australian dollar ($.6452); the New Zealand dollar ($.5624); and the Swiss franc ($.8256).  The only major global currency which strengthened against the dollar was the British pound which reached $1.50.  The Japanese yen held at $.0103.

The word which the US Treasury had hoped to not have to use is creeping into discussions.  That word is “deflation”.  Deflation is when prices continually decline over a period of time.  It is not a good economic condition because it impacts credit availability and makes it more difficult to pay off debts.  With credit still too tight now to spur the economy, deflation could lead to a whole new round of economic woes.    The Federal Reserve has made it clear there is a possibility of interest rates being reduced again if it appears price stability is being lost.

So what is going to go down the tube next?  You will just have to stay tuned, because it appears it might be insurers other than AIG.