WASHINGTON, Sept. 20 (UPI) -- Lose some, win some. And sometimes when we are right, we wish we were wrong.
Back in July, the very day we rashly predicted in an analysis that the Dow Jones industrial average would never rise above 8,000 again during George W. Bush's presidency, it did just that, and rebounded strongly to 8,700 over the following weeks. Unfortunately, it has just slid below 8,000 again.
Once bitten, twice shy. We won't ignore short-term volatility so cavalierly again. Perhaps the Dow will rally strongly and soar again. Nor does the current market slide appear to be the start of a cataclysmic collapse. But there are quite a few depressing reasons to believe that this may be the start of another sustained and discouraging slide.
First, as United Press International's Economics Editor Martin Hutchinson and Chief Economics Correspondent Ian Campbell have predicted, third-quarter earnings results have been poor and this appears to have been the biggest single immediate factor in once again driving stock values down.
To quote Friday's New York Times: "Bad news has already come this week from J.P. Morgan Chase, McDonald's and Oracle. ... Morgan Stanley, Electronic Data Systems and Knight Ridder joined the parade (Thursday)."
These firms are not just big, they are blue-chip leaders in their respective fields. And as the Times also noted, their declines were not compensated with gains in market share and rises in stock value for their rivals. On the contrary, their falls pulled their competitors lower as well.
In other words, investors were not moving from shrinking slices of the pie to expanding ones. The whole pie in these sectors was shrinking. When the entire economy shrinks, we call it "recession."
As New York Times columnist Paul Krugman noted, also on Friday, "industrial production is falling and layoffs are rising." The unemployment rate, at 5.7 percent, is still apparently generally low. But Krugman argued that things are worse than they seem because "an unusually large number of workers have given up searching for jobs."
This renewed slow shrinkage of the U.S. economy is the second reason to suspect share values may slide a while again. A falling or receding tide is bad for all the ships and boats, big and small, that float on it.
Third, let us note that energy prices are pretty high and likely to get higher. Oil is floating again around $29-$30 a barrel. And as Ian Campbell noted in a recent UPI economic analysis, if war with Iraq erupts this fall or over the winter, even if the war goes as fast and well as Bush and his advisers expect, oil will still spike to probably around $40 a barrel. And if that happens, it is not likely to come down in price again soon.
That would mean looking at a one-third, or 30 percent-plus, rise in energy prices right at winter time, when demand usually rises anyway.
Fourth, as Campbell and others have repeatedly pointed out, war in general is never good for stock markets. They like predictability and certainty, not the inherent uncertainty and risks, even chaos, that war invariably brings in its wake.
America historically has always prospered by staying out of wars -- especially big ones -- as long as possible, rather than going charging into them as fast as it can. Judging by the rhetoric from Bush, Defense Secretary Donald Rumsfeld and Deputy Defense Secretary Paul Wolfowitz, this elementary truth was so well understood by previous great Republican presidents such as Ulysses S. Grant, Warren G. Harding, Dwight D. Eisenhower and Ronald Reagan. It does not appear to be understood at all by this one.
Fifth, the July slump brought the Dow to a four-year low and the market overall to a five-year one. If a new slide breaks through those basement levels, the psychological effect on investors could be considerable.
Sixth, he does not appear to realize it, but Bush has now lost all credibility with the markets. The Times Week in Review Section mischievously noted last Sunday that whenever the president has made a major address on either the economy or major issues of war and peace in recent months, the Dow has responded by taking a triple-digit drop. Investors were not even this disrespectful to Richard Nixon during the 1973-74 quadrupling of oil prices, when the Vietnam War was still raging.
Seventh, as Krugman also noted, this appears to be an administration without any ideas about the economy. It played its one big card, the great $1.35 trillion tax cut, but the economy did not leap ahead as it was supposed to. It got up, staggered along a few steps, and is now already wheezing out of breath.
As far as Bush and Treasury Secretary Paul O'Neill were concerned, this was not supposed to happen, although in UPI Analysis and for that matter, virtually every U.S. analyst and economist who does not sit on Bush's particularly inept Council of Economic Advisers had no trouble predicting that it would.
And as columnist Krugman noted, when O'Neill "was asked for new ideas that came out of the comical Waco summit, his answer was -- are you ready -- making the tax cut permanent."
Eighth, as Hutchinson has repeatedly argued in his Bear's Lair analyses for UPI over the past two years, sloppy U.S. accounting procedures and feel-good, insider boosterism among published Wall Street analysts had vastly artificially inflated the values of a wide array of key stocks over the past decade.
Because of this, Hutchinson warned, the market would not bottom out until the Dow hit 6,000, or even lower. And as we noted in a UPI Analysis on Aug. 8, "By that reckoning, when the great rally of two weeks ago took place, only half the shoe had dropped in the current bear market."
As we noted in early August, Bush, O'Neill and their advisers appear to be in continued denial. Despite all their beliefs to the contrary, the classic, long-term symptoms of a long recession are now beginning to kick in following the more rapid and spectacular market slides that always precede such developments.
As we noted then, first U.S. consumers watched much of their savings and investments vanish in the market bubble bursts and spectacular slides of the past two and a half years. Now, they are starting to cut back at last on their spending. This is having a disproportionate impact on share prices because 20 years of onward and upward mindless boosterism have conditioned investors and market analysts alike to expect and plan for far bigger improvements in sales per quarter than are now taking place. On the contrary, continued and unexpected declines in revenue are now even buffeting longtime "untouchable" companies like EDS and McDonald's.
By now, we are in classic recession territory where Hutchinson's big, mean bears roam. As businesses see their sales fall and their profit margins dwindle or vanish, they respond by laying off staff in large numbers and abandoning ambitious or optimistic investment programs. Expectations of future earnings then plummet accordingly among investors and stocks -- and hence, the companies' valuations -- fall further, too. And before you know it, a deflationary cycle is in place.
Back on Aug. 8, we noted, "We did not expect the Dow rally of the last two weeks to last and, unfortunately, we were right. We will not dare to predict when it will next drop below 8,000, nor rule out other rallies above that benchmark figure again. We have learned that lesson. But we note that the rally was short-lived. And we further note that such exuberant, desperate rallies and upward as well as downward short-term market volatility were the marks of Wall Street in the weeks after the Great Crash of 1929. But they never lasted, and the overall trend was down, down, down." It still is.
The administration does not have to sit back passively and watch these tumbling indices like a hypnotized bird obsessed with the eyes of the snake about to swallow it. But the president and his advisers must awake from their dream that their Sacred Tax Cut, reckless deficit spending and even more manipulation of the interest rate mechanism alone will carry them through. They will not. And if these policies continue, it will be far, far worse before it gets any better.
