Stock Market Meltdown Brings Out The Smart Guys

We’re all smart guys now!  Right?  Last Monday on concerns the US economy was set to “jump the shark”, the TSX lost over 604 points or 4.75%, the biggest one day drop in seven years.  For all the people with money it was like they got hit in the gut.  However, for those with no money, it was another day in the Canadian economy.

This is what all the smart guys will be saying in the next few days.  “It’s an over reaction”.  “Keep buying those mutual funds because this is just the normal business cycle”.  “There are buying opportunities out there.”  “The market will be back.”  Oh, to be a smart guy, the morning after.

I speak from experience.  In my other writing genre, I’m paid to decipher the nuances of corn futures prices.  So in many ways I’m almost as bad as all these smart guys who didn’t see the 600-point drop.  However, I never make claims that I know what commodity prices are going to do. I offer the advice of what history tells us.  Being a smart guy who tells the commodity story is always smarter than being dumb enough to predict prices.  The carnage on the stock market floor is testament to that.

So what up?  How does this happen and what’s the reason behind the entire hubbub?  Much of it has to do with the state of the US economy and the threat of recession.  We are still several points of economic growth away from that, however, many of the smart guys now that Monday is over say it’s coming.  You as readers of this column know all about the sub-prime mortgage disaster in the US.  That my friend is still going on and the reverberations of that were surely felt on the stock market floors last Monday.

The other force in the Monday stock meltdown is the piling on effect.  One person sells, then two, then three, then a trading floor and then all of those computer algorithms kick in and you have the TSX exchange down 604 points.  It just so happened the US exchanges were closed for Martin Luther King Day or it could have been worse.  Needless to say as I write this, you can almost hear the bears lining up in American markets.  I expect the bears to rage Tuesday, sending American markets down too.

The bigger question might be what happens to the American economy and how will that impact us here.  The fear of course is that the American economy will contract with at least two consecutive quarters of negative economic growth.  We’re still not there.  However, the sub-prime mortgage problem hasn’t let up.  The US Federal Reserve may continue to cut interest rates in an attempt to stall that.  President Bush has added stimulus to the economy with a series of tax cuts and incentives, which add up to $150 million.  Global stock markets decided that wasn’t enough leading to the Monday sell off.  However, in my mind the US economy is still a long way from warranting that.  So we’ll see as time goes by how the markets will adjust.

Lost in this white-hot stock meltdown/US economy debate is the US Greenback.  It’s down 37% from recent highs in 2002. Since 2005 the US dollar is down approximately 17%. Translation, US goods are much cheaper than they were a few years ago.  That in itself is as great a stimulus to the US economy as the cheaper loonie was to the Canadian economy of years past.

So what happens next?  At press time, which is always Monday night for At Issue, I’m expecting our old friend Bank of Canada governor David Dodge to cut interest rates on Tuesday.  I also expect the US Federal Reserve to do the same soon.  This will have a stimulus effect in the US and the same in Canada.  It also should pull a little more steam out of the loonie, which has now swooned to 97.31 cents US, down from 1.1009 on November 7th.  Where are those smart guys who last November 7th said it was going to $1.18?

Let this be a lesson to us.  Much has been said with the advent of China and India how the US economy is losing its “position” as a major player in the world’s economy.  However, this is still the world’s richest nation and when their economy gets a cold the rest of us get a very sore throat.  They will not give up their economic pre-eminence easily.  Tales of their imminent demise are greatly exaggerated.

So where, oh where will the smart money go now?  I don’t know.  After last Monday, I don’t know if there is any smart money left.