Friday, February 20, 2009

Where Has All The Money Gone?


Where have all the flowers gone?
Long time passing....

Pete Seeger


Forget the flowers, Pete. Where has all the MONEY gone? The usual barometers of our nations’ wealth - the stock indices - have shrunk to levels not seen in years. Equity market investors are used to seeing stock values moving up and down, but the last six months have been particularly alarming. Even the wealthy have been forced to reconsider their lifestyles.

The Dow Jones Industrial Index set a new 10-year low this week, falling below 7,500. It is not just that it has fallen to this low level. It is the speed of decline that has people on edge. Just sixteen months ago, in October 2007 that the Dow was near 14,000. In just four months the Dow returned to its level of pre-Internet days in late 1997. That is a very “short time passing.”

In my post November 21, 2008 post “Unwound” I tried to make a case for a support level at 8,000 , which was the level of the Dow at the time Internet technology was first introduced. I pointed out that use of the Internet created unprecedented efficiency in communications and transactions, changing the way businesses and individuals interact. Those efficiencies are embedded in our economy and cannot be erased, I argued.

That analysis was not even close to the mark. Even as the Internet was revolutionizing communications and commerce over the last decade, other forces were afoot that would ultimately threaten the entire banking and capital market systems. Failure to properly assess risk - supposedly the primary competency of banks - has brought credit markets to a near halt. This is not just a matter of one firm having difficulty; it is a matter of system failure.

What is the valuation “discount” for system failure? Theoretically, it could approach 100%. Indeed, if the banking or capital markets systems are non-functioning we are nearly back to barter as an economic system. We know from economics class what this means for pricing and the pace of the economy. The U.S. has long been held up as the source of efficient markets because of the depth and breadth of our stock and bond trading. If investors suspect the system has been impaired there is no value.

Until confidence in U.S. commercial and investment banks is restored, astute investors must remain uncommitted.


Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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