Recession - What's Happening?

What is the trigger?

There can be no doubt that we are in the midst of some very troublesome economic times. The meltdown of the housing industry in the wake of all the greedy sub-prime lending coupled with $100 a barrel oil have put the U.S. economy in a real tizzy. Worldwide, markets are being affected by the weakening of the U.S. dollar, and there is no shortage of headlines to stir up public emotions in every major city. The problem is serious enough without the chicken little “sky is falling” headlines. But when I read the leading article headers on three online news sources before 6am this morning and they all were trumpeting the drop of every major foreign market over the three-day weekend, they seemed to me to be a sort of guarantee of panic among investors here as well, as soon as the markets opened today. Investing is so sensitive to emotion that national economies are vulnerable to such media hype. Today was a disaster for the markets in China, and that will have a serious effect on our markets on Wednesday, no doubt. People have their narrow little comfort zone and it doesn’t take much to discomfort them. But it seems clear to me that too much of what drives us is fear, not facts. Headlines, not hard evidence. You see, when the headlines around the world hammer on the topic of the housing crunch, foreign investors get jittery. When they get jittery they steer investments away from the U.S. markets, the balance of trade becomes further unbalanced, and the dollar weakens. The weakened dollar causes a whole cascade of other problems including the impact on American tourists abroad paying more than they imagined for their vacations, and that results in less foreign travel. We really do now have a global economy and just like a mobile, if you touch one part of it, the whole thing moves. What is a little scarey is that in recent times it seems that you only have to look like you might touch it, and the whole thing starts to move.

We know that it is the institutional investor that drives the markets, right? Not the individual trying to eke out another point or two from his IRA or his 401K. But I’m beginning to believe that panic stirred up by “worst case scenario” reporting can galvanize a large body of private investors and they can become a force in the financial markets too. I don’t believe that a single pension fund manager or other institutional investor with a portfolio of $500 million to manipulate is going to have much more influence on market trends than 50,000 individuals all moving around their $10,000, or 20,000 trying to decide where to put their $25,000 401K funds. The point is that if enough momentum develops based on panic created by headlines, $500 million dollars can create a pretty good shift, and I think that is what we are beginning to see repeated over and over, day after day. Abroad, the media is telling foreign investors that the U.S. is headed for a serious recession and they better protect themselves. Not too unlike my whole generation sitting in the hallways of our elementary schools with our heads covered by our arms because we were all sure that at any moment a nuclear bomb was going to land on our heads. Now, I’m not the brightest bulb in the chandelier, but I do know that sitting on the floor with my hands over my ears is not going to offer much protection from a nuclear blast. But since we seem to now have a very large herd of panicky investors pushing us to the brink of recession, we do need to have a plan for protecting our retirement finances. Tomorrow we’ll talk about how to protect your 401K, or at least how to reduce your losses in these turbulent times.