Money for Poets 101: An Essay on the Stock Market in Chaos

Not in the sense of "poets' physics," or "rocks for jocks," but let's face it, who couldn't use a crash course in high finance? And a crash course is exactly what we should call it, because stocks today are more vulnerable than ever before to crashes, "corrections," and even one-day aberrations like the "flash crash" of May 2010 when, during a single afternoon, a computer error triggered a dire convulsion, with some stocks losing a third of their value. Electronic speed being what it is, things that used to take three months to happen can take place in the course of a day that may begin with a two-hundred point drop and end three hundred points north of the previous day's close.

Most poets' eyes glaze over when they hear the words "credit downgrade" or "debt ceiling," and that's a pity not only because these phrases have their poetic potency (as Julie Sheehan has shown), but because it's your money and you should trust no one with it, and if you're a poet you're probably a control freak, and the basics of investing and the allocation of your assets are not uninteresting subjects for a control freak.

Money is a kind of poetry, as Stevens said, not facetiously. And Archie Ammons explained that money resembles poetry inasmuch as both are ways to negotiate desire.

The stock market is nothing more or less than the way we measure wealth. All values are relative, and the value of capital, and especially of stocks and their derivatives, defies scientific analysis. Price-earnings ratios, earnings momentum, cash flow: all these seemingly objective criteria are far less important than mass psychology for the outcome recorded in the stock market storecard. In the simplest terms, markets are high when people are feeling rich and low when people are feeling down. In a rational universe, markets vary according to the laws of supply and demand. In a volatile universe in which the forces of anarchy and entropy have their say, the movement of markets is determined in the dynamic between greed and fear, which interact in the human psyche in the way that the Dionysian and the Apollonian act upon each other in Greek tragedy according to Nietzsche. Greed makes markets go up, fear makes them go down.

Law one: markets go down faster than they go up. Much faster. Maybe by a ratio of three to one, or better than the odds-on favorite at the Preakness or the Belmont.

Twice in the last week the market -- that is, the Dow Jones Industrial Average as a surrogate for all the stocks traded on the New York Stock Exchange -- was down by more.than five hundred points. Today it recouped some losses, bouncing up four hundred points, after traders assimilated the Federal Reserve Bank's announcement that short-term interest rates will stay low for two more years. It's Fed-head Ben Bernanke's moment of glory. They're calling him Big Ben on TV.

Good news, certainly, and a heartwarming market reaction, but the continued volatility is an unambiguous indicator of uncertainty, which Wall Street hates more than anything else. So for now and until further notice the stock market remains a worrisome thing that'll leave you to sing the blues in the night. At least yesterday's panic selling is over. For now.

Law two: Never sell into a panic. When people panic, get out of the way. And people are panicking all over. It is taking a violent turn in law-abiding London and Manchester where gangs are looting stores and setting them on fire. That's one kind of panic. Here, in more orderly corridors, investors are rushing to the exits, selling their shares at a twenty-five percent discount, and buying gold. This is classic "flight to quality," and it must be said that gold has been the best investment strategy for a whole decade. Still, it has reached the unprecedented height of $1,700 an ounce, more than even the most dedicated gold bugs can have foreseen. Could the precious metal be the latest bubble to await bursting?

For most this is a time for doing nothing, and that includes filing your latest retirement-account statements without looking at them. For the adventurous few, it's tempting to buy some things on the cheap. Experts who rarely agree on anything else concur that this is an oversold market, and it may be a good moment to swoop in and pick up desirable stocks at their lows. But that is neither for the faint of heart nor for the contrarian of mind.

Which shares to buy if you do have the cash? With the bank paying nothing for the dough in your savings account, and with bonds and treasuries yielding tiny fractions, the smart money will probably gravitate to dividend-paying blue-chip worldbeaters such as Exxon Mobil, Chevron, Intel, Disney, UPS, Johnson and Johnson, and Pepsi  -- all of them undervalued as a result of the activities of the past week. With a portfolio centering on these and such other standbys as Warren Buffett's Berkshire Hathaway, current market favorite Apple, evergreen IBM, Coca Cola, Procter and Gamble, American Express, Wells Fargo, Microsoft, a patriotic rail or two (Union Pacific, CSX) and a couple of water and electric utilities, you can pretty much throw away the key and sleep soundly at night. Extra disposable income might be well used in a mutual fund specializing in resource-rich Canada.

What has led to the present impasse? The market's forward momentum, fitful at best after the lows of March 2009, lasted two years. In March 2011 Japan's earthquake, tsunami, and nuclear meltdown threw everyone for a loop. Even worse for the global economy has been the show called the "European contagion." As in a comic opera, Portugal, Greece, Ireland -- one after the other, each played by an aging soprano -- teeters on the edge of a cliff until a helmeted Valkyrie steps in and saves the overfed maiden. The whole idea of a European economic union, with a single currency, comes down to the kindness of Germans and their willingness to work harder than their neighbors. Sometimes you lose a world war twice but still come out on top. 

There are those who maintain that recent jitters on Wall Street have more to do with Europe's finances in shambles than with the US economy per se, and then you add the turmoil of Arab spring, the nuisances of North Korea and Iran, and most important, the emergence of China as America's biggest rival. We're told we're not going to have a double dip recession. And we probably won't. But it's hard to overlook the growing gap between the extremes of wealth and poverty in this country. Formerly the rich favored liberal social policies as an easy insurance policy against revolution. But that spirit is on the wane, and liberalism, like the conventional wisdom, is wrong and has been wrong for forty years, at least according to the conventional wisdom.

The balance sheets indicate that corporate America is in great shape. All that outsourcing, that downsizing, that cultivation of foreign markets, has paid off big. On the other hand, as economists say, nearly one of every ten workers is unemployed, a lot of homeowners are defaulting on their mortgages, and shrill law school brats on cheap late night TV commercials are hawking the virtues of bankruptcy. Something's gotta give.

We need to figure out a way to get corporations to repatriate their foreign earnings. At the moment, they would prefer not to, because if brought into the US those earnings would be taxed at conventional rates. So the money stays abroad. Some corporate managers have been lobbying the bureaucrats to lower the tax rate on those repatriated funds as an inducement. That would be the carrot if a carrot and stick policy is in order. We need those profits working for the economy and we need the revenues from the tax on those profits to keep the government going, though it may be time to consider something radical -- like eliminating the House of Representatives or keeping it just for show like the House of Lords in London.

We talked it over tonight at my place. My friend Paul said, "Everyone knew all along that they wouldn't default, so how come the markets tanked after they struck an eleventh hour deal to avert the catastrophe?" I like his wife Nancy's answer. She talked about the sorry spectacle of the DC lawmakers. "Posturing, sure, but a few of them did seem capable of walking the economy off a precipice. It was a shameful display." It may have scared people, and any retailer in America can tell you that Mr. and Mrs. Future, the American consumer, lacks confidence. Paul would add that political leadership has been lacking, and he has a point. When the key phrase in an Obama speech is "a balanced approach," the oratory is not going to lift spirits or stock prices.

One last thing. Is this like 2008? No way. Nor like 1987 when a 508-point crash on an October Monday was something it took us three months to absorb, which we finally did when a silver-haired man in a three-piece suit, a lisp, and a smile, reassured us that this wasn't 1929. -- DL

Comments

[Laura Orem]

Another reason poets shouldn't panic is because we are...well...poets, and by definition most of us don't have a lot of money anyway. I wouldn't know a stock from a bond from a duckbill platypus.

There are advantages to being fiscally oblivious. I won't get rich, but I won't get ulcers, either.

[mitch s.]

I'm glad to see a discussion of financial issues here on the BAP site. I wish I had greater understanding of markets and related issues. I feel I did learn something, however, from an interview I saw some years ago with the financier George Soros. It was after the crash in 87, and Soros was asked if the thought there was reason to believe that the market might crash again.
Soros answered that at every moment there are always good reasons for markets to crash. But those reasons only emerge after the crash has actually taken place. A credit downgrade, interest rate fears, or whatever, might already be in place but they only become "reasons" in hindsight.

It’s like, “Mike Tyson is invincible. Nobody can beat him.” But after the Buster Douglas fight, it’s, “Oh yeah, he was ready to lose. He didn’t train hard enough. He was smoking weed with the geishas over there in Japan. You could see it coming.”

It's the same with relationships, isn't it? A couple might have real problems -- snoring could be one example. A man might have snored for thirty years. Then one night his wife says, " I'm leaving." The “reason” for leaving was always there, but it only became a reason when it was acted upon.

One more thought. In 1979 there was a major plane crash in Chicago. I was walking my dog when I became aware that dozens of sirens were sounding all around me at the same time. Strange! Well, all the ambulances and fire trucks heading out to the airport. Anyway, it turns out that not long before the crash a man had called American Airlines and reported a dream in which he saw a DC-10 aircraft crash as an engine fell off the wing on takeoff. He described exactly how this looked and said he was very disturbed by it. Could the airline do something? Of course, there was nothing they could do, and the crash happened exactly as the man described. This was all documented and authenticated.

In reading about this kind of paranormal phenomenon, I learned that found that researchers immediately discount and ignore anyone who reports precognition after the fact. In other words, it’s considered worthless to say, “I knew that was going to happen. I had a dream, etc.” You’ve got to say it before the event actually happens. This seems a reasonable approach for market fluctuations also. Anyone can say, “I knew it was going to happen. Here are the reasons why I knew. Blah, blah.” Again, the reasons are always there – but they’re not really reasons until they become operative. On the other hand, if you can see what’s going to happen before it happens, place your bets. “Do you feel lucky, punk?”

Finally: who is the silver-haired man with a lisp to whom David refers? I was thinking Andy Griffith but don’t know if he lisps. Andy's colleague Don Knotts is another possibility, as he has gone gray. Or Warren Buffett?

[DL]

Thank you for the comment, Mitch, wise as it is witty. Yes, the reasons are reasons only after the fact, and predictions are worthless except in a casino, like Ladbroke's of London, where you can get odds on who will become the next pope or how old Prince Charles will be when he succeeds his Mama on the throne: long-term situations where the time between bet and payoff is incalculable. Also, defeat is an orphan and victory has a thousand fathers, which is always quoted in films about JFK, the bottom line being this: only in retrospect is history inevitable.
I wanted to create a little mystery with the silver-haired man who lisped, but I was thinking of a segment of Wall Street Week with the late Louis Rukeyser who had a knowing glint in his eye and spoke very calmly after the crash, reminding viewers that this event, though lamentable, needn't affect you unless you panicked and sold your holdings (or unless, alas, you had no choice but to sell at that time, because you needed the cash for college or a house, in which case you shouldn't have been in the market at all, which is easy to say in hindsight but who knew it back then?) Am I crazy to find this stuff fascinating? Crazy like a fox!

[Spencer Hale]

I love the first comment saying that in the end it really doesn't matter because we're poets and we wouldn't know what a stock bond was if it bit us. The first and most important thing to worry about is you and your family. Do the best you can with whatever situation you face and you'll be off to a good start.