Thursday, November 8, 2012

World Financial Market -- Is That Atlas Shrugging?



The day after Obama's re-election, the Dow Jones Industrial Average plummeted 300 points. The morning of November 8, 2012, it continued its spiral lower.

The trend actually started late last week, prior to the election. While this demonstrates that the electoral news was not the only factor in the continued drop,  it did impact its continued trend.

The reasons analysts give are varied. In reality it is an aggregate of many factors coming to a head at once.

I want to caveat this by stating I am not an economist. I studied economics and once pursued that degree in college. I understand the basics better than your average citizen. But I am not an expert. This is just my lay analysis based upon what I have observed and what actual experts are saying.

The European economic situation is one of the largest causes. Greece appears even less able to pay off its debts as they report an all-time record high unemployment rate. This caused market problems and market timidity with European businesses and European banks. The news fed into American investors who backed off, or attempted to sell-short. The market fell more. Many investors around the world still look to the US market. Seeing the DJIA and NASDAQ fall here just increased the trend on the world scale.

Then we had elections on Tuesday, November 6, 2012.

The re-election of Obama alone is not what is affecting the market. Some investors and funds may consider that a large decision to "Go Galt" and liquidate. By and large, though, Obama's re-election, alone, is not the cause.

The electoral outcome resulted in what appears to be a repeat of the past two years. We have a House with a Conservative majority who will seek spending cuts, fiscal responsibility, and a balanced budget. We have a Senate with a socialist majority who will not cut that spending unless it means cutting the one thing the US Constitution mandates federal spending be used to provide:  the military and national defense. They will block any spending cuts that will affect those whose votes they purchase by providing government subsidies. The result will be a stalemate.

Since Congress will likely continue in a stalemate, the executive branch (Obama) will issue executive orders directing more and higher regulatory fees in order to garner revenue.

Tax cuts that were made temporary, for some unknown and illogical reason, are set to expire. So Capital Gains and Income taxes are set to automatically increase. This includes the return of the 10% income tax bracket, meaning that many working poor will now face taxes they have not faced since the "Bush Tax Cuts" went into effect. That will make it unprofitable to expand many businesses, thus making GDP predictions reflect little to no growth. If companies aren't going to grow, or are punished for growing, production and prosperity will decline. Why would anybody invest int something that looks like it will lose money?

Then this affects not only your wealthy. Most working Americans in lower-middle-income-brackets and higher have some form of retirement fund. That fund may be a 401k or IRAs or Roth IRAs. These are usually linked to mutual funds, stocks, bonds, futures, and the like. When the market declines do to poor economic forecasts or a lack of market stability, those funds suffer. There goes the nest egg for middle-income-workers.

Also, there goes Social Security. Why? Well, less capital means less jobs and lower paychecks. Lower paychecks means less put into those private retirement funds. It also means less Social Security and Medicare revenue. 14% of $100 is $14. 14% of $50 is $7. See how that works? The less you pay into Social Security, the less you receive once you reach retirement age. So, that nest egg faces uncertainty and hard times as well.

Take all of that together with the poor performance of the European market and industries and you are looking at a bleak future. That bleak future becomes a self-licking ice cream cone and becomes a bad today.

Looking at that picture, many investors are scaling back in order to protect what they have left and wait until the market looks better. In essence, they are removing their resources from the pool. They are "going Galt" to a minor extent. The more who do so, the more the situation aggravates. Atlas starts to shrug.