Do the latest stock market plunges mean anything ? Two 1,000 point drops in the DOW within four days. Even after a 500 point gain on the 7th the DOW is down 2,000 points in a week. But we’re assured the “fundamentals” are fine, nothing to worry about. It’s just a “correction” and so it’s “healthy”. In fact you should follow the supposed practice of Warren Buffet and buy stocks when everyone else is selling. “Buy the Dip!”
Since the “stock analysts” jobs depend on it, they always see nothing but a rosy tomorrow and they might be right in the short run. There’s been other big drops out of nowhere that meant nothing at all. (In October 1987 stocks lost 22% of their value in one day, but within a couple of weeks all was back in the black.)
Still another big shock is coming, maybe soon or maybe a bit further in the future. Capitalism booms and crashes. It’s the nature of the beast. We’ve been out of Great Recession for 9 years and in the last couple there’s been a boom. Even working people got a taste of it in the last couple years with wages actually rising a bit higher than prices. But we are coming to the top of a business cycle. Just like other highs things look great. The stock indexes hit record high one day after another. And Trump has put the economy on steroids, immense tax cuts, a war on regulations, cutting back the number of people who watch for tax cheats, etc. Unlike a typical Republican he doesn’t care a tinkers damn about running up the national debt. The deficit could grow to $1 trillion this year under Trump. So what. Stocks are up. Dig the Euphoria. What could go wrong?
Because capitalism has developed a whole sector involving stocks, bonds, loans and currency, inevitably people try to think up ways to make quick money manipulating that sector. Just before the Great Recession (2007-2009) it was mortgages. “Securities” (that were anything but secure) were created that were made up of slices of hundreds of different mortgages, many of them given out to people who had very, very weak credit. See the movie “The Big Short” for a sense of the spirit of the time and the total denial in the middle of the last decade that anything was wrong. Here’s a trailer.
What speculation will set things off today, the immense amount of student loans, “sub-prime” auto loans or will it by cryptocurrency? You may not know that last term, but you’ve heard of Bitcoins. No government stands behind this new money, but a tech called “blockchain” is supposed to guarantee that cheaters won’t just make them up without limit. It has become very popular. In 2011 one bitcoin was worth one U.S. dollar. In 2013 it hit $1,000 and dropped to $450 the next year. At the start of 2017 it was $750, but by the end of the year one bitcoin would fetch $17,000. Wall Street started to treat it with respect. The number of imitators of bitcoins, each with their own systems, rose to 1,300. By January of 2018 the total value of all these cryptocurrencies was over $700 billion.
But that was so, so last month. Bitcoin crashed and dropped down to $8300. Credit card companies are starting to ban purchases of the coin and Nouriel Roubini, an economist who predicted the crash at the start of the Great Recession, says Bitcoin is the mother of all bubbles and that it’s absolutely worthless.
Bitcoin dropped a lot this week, but it may not have had much effect on the stock market. Something else might have, XIV. No, that’s not the roman number for 14. It’s something you can buy on Wall Street. There’s a measure of how excited or calm the stock market is. This measure of “volatility” is called the VIX index. So, of course, someone figured a way to turn it into something you can bet on. Since stocks have been going up steadily in recent years, the new security was a bet on how calm things would be. In naming the product, they reversed the letters in the VIX index and called it XIV. Tons of money went into it and in 2017 fortunes were made, but XIV was a real bad bet this February. Things have gone volatile to the third degree.
Jim Cramer, the stock market host/entertainer for “Mad Money” on TV talked about it yesterday. He said there’s 17 funds that work like XIV and they all take “leveraged bets”, that means they lend you they money to play. Cramer said, “Now they’re all imploding,” he said. “I swear, some of these dopes never learn. The current situation is like a similar version of what happened in 2008 after hedge funds levered up — borrowed money — to bet on mortgage-backed bonds.”
A new “sub-prime”, bitcoins, volatility, tulip futures? Sooner or later some speculation will really come a cropper and we’ll have to invent a new name for bad times. Writers take note, “panic”, “depression”, “recession”, “downturn” have all been used before. How about “negative upward surge”?
Anyway, fasten your seatbelts. It’s going to be a bumpy ride.
Postscript: For young readers who don’t get the joke about my title, in 1932 a song writer named Yip Harburg wrote “Brother Can you Spare a Dime” for a Broadway revue called “Americana”. It’s story about the people who built the country who where now out of work in the Great Depression. By the way Harburg went on to write the lyrics for a movie called “The Wizard of Oz”. In the 1970’s the New York Times asked Harburg for an update on his song of ’32. He gave them this ditty:
Once we had a Roosevelt
Praise the Lord!
Life had meaning and hope.
Now we’re stuck with Nixon, Agnew, Ford,
Brother, can you spare a rope?