Financial Crisis, 20 Mar 2009: Weekly Wrapup

The market’s corrosive slide has had a surprising bounce over the past weeks. In fact, had you picked the bottom of a few weeks ago, and you would have been part of the best 2-week run of the S&P500 since 1974.

A cursory look at the last week’s close to this week’s close alone would not show that. The week-to-week change in the Dow was a modestly buoyed 54-point rise: from 7,223.98 on the close of 13 March to today’s close of 20 March at 7,278.38. That modest rise does not tell the complete story of the volatile market for the week.

Just as one comparing the present day’s close to the close of 7,270.89 on 25 February would have left out the volatile weeks in between.

Wall Street began with a rocky Monday, which saw an up-and-down day nearly as high as 7,400 and then falling back to near 7200. The Dow then had strong positive days Tuesday and Wednesday, including cresting over the 7,550 mark on Wednesday, 18 March, before it eroded, giving back nearly all the gains over Thursday and Friday. Friday alone the Dow sank back 122.42 points or –1.65%. The NASDAQ and the S&P500 were likewise off –1.8% and –2% respectively.

The rise of the Dow from less than 6,500 on 9 March to the over 7,550 intraday high on Wednesday represented a 16.15% rise in value. In the short term, that is a very bright reversal of the downward plummet of stocks. However, the Dow is still down 17% on the year.

AIG Bonus Pay — Cherry on Top?

The week’s financial news was filled with the comments about the AIG bonus pay of $165 million to its financial products unit managers and the government’s demand that it be returned, either voluntarily or through a special tax that sailed through Congress. Tim Geithner and Senator Christopher Dodd were both hammered and taken to task for letting provisions for such bonuses slip into the Congressional bailout package in the first place.

The bonuses were simply the “cherry on top” of a terrible heart-stopping dessert for the American tax payer. All of it is relative mountains-and-molehills compared to the amount of money already plowed into AIG. $182.5 billion of public money was invested into the company. The company is going to be forced to repay the costs of the bonuses to the taxpayers, and, on top of that, the individual compensation will now face a specially-passed 90% tax. As will any bonus compensation made to individuals with incomes greater than $250,000 working at companies that received $5 billion or more in federal bailout funds.

A Trillion Here, A Trillion There...

The U.S. Federal deficit for 2009 is likely going to be $1.8 trillion, and another $1.4 trillion for 2010. The Congressional Budget Office (CBO) announced that it projects Federal deficits to accrue another $9.3 trillion in debts between 2009 and 2017. The national debt already stands over $11.0 trillion (specifically $11,039,686,130,898.10 as of 19 March 2009).

The Federal Reserve waded into the situation by offering to buy back $300 billion of Treasury bills, and to acquire $750 billion of Fannie Mae and Freddie Mac mortgage-backed securities, and another $100 billion of their outstanding debts.

The gross U.S. debt had been as low as 58% of Gross Domestic Product in 2000. By the time of the end of the Bush administration, that had risen to about 75%. This year’s deficit alone will amount to 11.9% of GDP. The next year deficit will be an estimated 7.9%.

As the national debts pile on, so do the unemployment figures.

Job Losses Mount

The national average for unemployment in Febrary was measured 8.1% by the Bureau of Labor Statistics. However, that rate may rise given new information out of leading industrial states like California and Ohio.

In California, the unemployment rate rose in February to 10.5%, the highest since April 1983. The 116,000 Californian jobs shed in February were the most lost in a single month in 19 years. Even the normally ebullient Silicon Valley has been hard hit. Last year, the unemployment rate was 5.1%. Today it is over 10%.

Likewise, Ohio faces a 9.4% unemployment rate, up from 8.4% in January — the worst situation since 1984. A year before it had stood at 5.9%. There were well over a half-million unemployed in Ohio in February 2009 — 566,000 — versus 349,000 unemployed a year ago in February 2008.

Global Setback

The U.S. economic recession is not a localized market issue. The International Monetary Fund acknowledged today that the entire global economy is now in a recession. The overall world’s production will slump 1% over 2009. Some economies will grow, but not as fast as they used to. Most will be in recession, and some be hit far harder than others. Japan, for instance is expecting a retraction of 5.8% in its GDP. Europe will be down 3.2% on average. The U.S. will have a relatively mild 2.6% retraction.

The question will be how fast the global economy can spring back after sustaining such precipitous losses. It also doesn’t mean that the problems will go away. Even if the market sprang back 16% over the past few weeks trading, there are still tremendous problems to be burdened, including the incurred national debts of various stimulus packages which were used to get the market moving again.

Sustainability is not done by simple means and gross averages. One cannot water a plant “on average” by drowning it one day after weeks of drought. Likewise, the instability of the present up-and-down market is not a sign of good health. It came at a price, which will be burdened for years and decades to come.