Irrational Exuberance?

Having kept an eye on the markets all day, I have observed some interesting things. Benny and Co. dropped the discount rate by 3/4 percent just before the NYSE opened. This was a panic move on the Fed's part due to the stunning losses all over the rest of the world on Monday, while America's markets slept. Aside from Monday's huge declines overseas, the ASX (which is 16 hours ahead of us here -- they closed on Tuesday afternoon at 4PM while it was still 2AM in New York) dropped again on Tuesday, as did the TSE in Tokyo. Benny and his boys probably did not sleep well last night.

The NYSE opened with a bang. Out of the gate, despite the rate cut, it lost roughly 450 points, then recovered to close 128 points down for the day. I observed something that piqued my curiosity. Bank of America announced a write-down due to its mortgage losses, and a reduction in its projected dividend. Its stock rose nearly 4% during the day. Citigroup, which is showing a higher P/E ratio, declined. When asked about this phenomenon, one who once worked for a brokerage stated that the people who made the buying and selling decisions were the guys who went to college, got C's, and spent their time drinking beer.

Then, today, I got another letter from BofA begging me to borrow some money from them. Just 1.9% through December 2008. Then it would reset to 25.24%. Unless I was a second late with a payment, in which case it would default to 32.24%, immediately. Go suck eggs, Bank of America. You and your predatory shareholders deserve to lose your shorts, and any government idiot that wants to bail you out should be tarred, feathered, and ridden out of town on a rail.

Why so sour? I had some input from two widely divergent sources today. One was Neal Cavuto, explaining why the government should let the market correct itself without any outside help. I could agree to that, but his reasoning was off. He pointed to the figures that show 3% growth in the economy and only 5% unemployment as evidence the economy was healthy enough to take care of itself. The other source made no reference to bailouts, but pointed out that huge numbers of people who were unemployed would never be visible to the unemployment bean counters. Again, on target, but there is a different reason for it in my mind.

Current tax law with lax immigration enforcement drove many of the tradespeople into "self employment", operating as "contract labor". The cost of employment taxes has been a burden for the small business person, and competition from the "paperless workforce" has driven down wages. Those self employed people in construction and all other aspects of real estate are now looking for work. They cannot collect unemployment. Their numbers are larger than the government can admit, because they never made it onto the radar in the first place -- they were skillfully evading the tax laws.

However, they were a substantial part of the consumer economy. While they exercised as many loopholes as possible to avoid taxes, their deductible expenditures were accounting for a significant chunk of consumer spending. They are no longer generating income to deduct against; they are not buying the cars and trucks and services they previously needed to buy in order to keep down their FICA "contributions", and that, in turn, is causing layoffs in other segments of the economy.

Mind you, I have no figures to prove this. I am going on gut feeling, and observations over the "back fence" of the economy. But I think Cavuto is very wrong in his assessment of the health of the economy, despite being right in his understanding that government tinkering with markets will do nothing but work greater hardship in the long run. It might make a good graduate thesis in economics, however. Yoo-hoo, Axlebender -- are you listening?

Meanwhile, in the Far East, it is Wednesday morning. Both the ASX and TSE are up from yesterday, and have almost gained back Tuesday's losses, but they are still below their Monday closing!. When I get up in the morning, I'll have to check on how they did overnight. If they cannot gain back some of Monday's losses, it could foreshadow a Wicked Wednesday in New York.