March Market Madness
March 30, 2007
March, once the domain of lions and lambs, is now best recognized in America as the month for madness. If you like nail-biting suspense, gut-wrenching, cliff-hanging win-or-go-home drama, adrenaline overload, heart-breaking losses, triple-digit point swings, victories snatched from the jaws of defeat, then March's stock market action is for you.
The excitement tipped off early when the Dow Jones took a 416-point beating on Feb. 27 in reaction to an overnight drop of 9 percent in China's red hot Shanghai stock market. Professional pessimists were quick to conclude that doom was at hand.
A more than 24-hour perspective, though, evidences that Shanghai's market was up 16 percent in the prior three weeks and had gained 120 percent over the past year.
The Shanghai stock market boom mirrors the boom in the Chinese economy, which has been growing at a 10 percent pace for well over a decade. But even with all that growth and a billion-plus people, the market value of the Shanghai Stock Exchange at $1 trillion is less than one-twentieth of the New York Stock Exchange's $23 trillion.
The other China-based stock market, the Hong Kong Stock Exchange, is sixth in the world with a market value of $1.7 trillion. The suggestion that a correction in the Shanghai Stock market would capsize the world's markets is just so much chop suey.
No modern market meltdown is complete without the specter of Alan Greenspan and he was glad to come off the sideline to show that he's still got game. The former Fed chairman went on record predicting a one-third probability of a recession, supporting his case with the usual flourish of arcane obtuseness: "Risk is no longer perceived as major risk, at least as it was in years past, and that, I must say, I find disturbing."
Alas, with his worry-beads no longer tethered to the monetary policy levers, Greenspan's predictive prowess may be impaired. The result may be a drop in his aura from omniscient maestro to that of fallible mortal.
By March 13, Shanghai was in recovery mode and headed toward new highs; not so for the Dow Jones, which suffered a 243-point drubbing.
The culprit for this spasm was subprime mortgage companies, specifically New Century Financial, the largest U.S. subprime lender.
New Century had been a high flyer during the period of historic low interest rates. Rising rates finally caught up with it and the stock collapsed 89 percent in the first two weeks of March.
The wipeout of New Century was bad news for its shareholders but it was a small blip in today's wide and diverse financial market place. Consider these numbers: 1) the total value of U.S. owner occupied housing assets is $21 trillion and 2) total U.S. residential mortgage debt $10 trillion of which $3 trillion is adjustable rate. Of the adjustable rate mortgage debt, 20 percent, or $600 billion, will have major resets in 2007, which will boost total annual payments by around $15 billion.
Will there be more foreclosures, bankruptcies and sad stories? Yes, yes and yes. Will it bring down the current expansion? Unlikely - the diverse and flexible nature of the $13 trillion U.S. economy gives it a depth and sturdiness that is vastly under appreciated.
If you want something to be concerned about, consider the International Monetary Fund, an institution that has received its share of criticism for some of the austerity policies it demands as conditions for its loans to client states.
The IMF was founded in 1945 to facilitate trade and assist developing countries. The IMF announced in January that it expected a shortfall of $105 million for the fiscal year ending April 30, and even bigger deficits for 2008 and 2009. Why? It turns out many of its client states such as Indonesia, Ecuador, Serbia and Uruguay are enjoying the robust global economy and are paying down loans ahead of schedule, eliminating the handsome spreads the IMF earns on those loans.
To the organization's credit, it still sees the glass as half-full with a forecast of 5 percent worldwide economic growth for 2007. In remarks on March 23, IMF chief Rodrigo de Rato noted this would be "the strongest five-year span for the global economy since the late 1960s."
The basketball version of March Madness will end with one winner. Fortunately, the economy and the markets will fare much better. There is a common thread between basketball and America's form of entrepreneurial capitalism: It is the lessons learned from failures and losses that form the championship teams of the future. Eleven months from now the madness will return and we will be the richer for it.
Ashby M. Foote III is president of Vector Money Management in Jackson, MS.
The work of Discovery Institute is made possible by the generosity of its members. Click here to donate.