Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
Ever since the subprime crisis burst on the financial scene in August shortly after the Dow broke 14,000, the equity markets have been like a stool propped up on four legs:
1) technology: thought to have at least six degrees of separation from the subprime/credit crunch/bank write-off mess;
2) China; thought to have similar separation except for a few of its area banks and considered to be a market of unending appetite for…
3) oil and commodities: the rapid rise of oil from the mid-70′s to the mid 90′s, and the accompanying rise in commodity prices, all fueled to some extent by the fall of the dollar in turn fueled by…
4) two Federal Reserve interest rate cuts aggregating 75 basis points, triggering a steady and accelerating fall in the US dollar’s value on world currency markets and to some degree helping US exporter profits and our balance of trade figures while also fostering fears of inflationary tendencies owing to higher import prices for goods beyond oil and commodities.
Until very recently, stocks with some connection to items 1, 2 and 3 and otherwise sound business results were doing very well and holding up the market averages within a few percentage points of the all-time high (in the case of the Dow) and the best performance since the dot-com crash (in the case of NASDAQ).
Suddenly, however, it all began to unravel as investors began to notice the internal inconsistencies in the four legs of the stool – to some degree, these market props were sowing the seed of their own destruction in terms specifically of their tendency to promote inflationary expectations which in turn would curtail further interest rate cuts, thus knocking out at least one of the props. Indeed, Fed Chariman Bernanke virtually said as much in his testimony to the Congres this week.
Well, a stool can get by on three legs, of course, if they are well-positioned, but the others got as wobbly as the San Andres fault this week with a little jolt from Silicon Valley itself, in the form of commentary from Honest John Chambers, CEO of Cisco, who indicated that technology sales might not be so immune from the effects of the suprime crisis after all in terms of slowing domestic orders from financial institutions (worried about their balance sheets), automakers (worried about slipping sales to credit-challenged consumers) and retailers (ditto).
In turn, fears of a busines investment slowdown in the hard-driving tech sector not only hit the market face like a wet dishrag, they also called into question the “global growth” story at the heart of the China and Commodities props. Indeed, oil — speculated early last week to be irretrievably heading to a price of $100 per barrel, was in retreat by Sunday night and into Monday as fear of recession (see my blog of a couple months ago predicting the rise of the R-word) took hold. Even China is immune from the potential effects of a US slowdown, it seems.
The straw that breaks the markets back, however, may not just be the removal of the four props, but the good old fashioned margin calls that apparently came thick and fast with Monday’s sunrise. It will be interesting to see what transpires Tuesday when the banks go back to work and their money managers survey the carnage. Black Tuesday, anyone? In any event, it looks like this roller coaster may head down again before heading up when it finds some new props. This will be a wild and woolly week.
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