Nothing like listening to tens of thousands of dollars slip out of your 401(k) in a matter of minutes, which is what I was doing this morning. The Dow dropped 1,082 points. The “circuit breakers” — the 7% dropoff point where trading is automatically stopped (to prevent a crash) — were set to go at a drop of 1,157, which we didn’t quite reach. But everything was down 6.5% within minutes of the opening bell. It made Friday’s drop off look like an anthill.
The Dow rebounded so that right now — at 10:00 am (half an hour after opening) — we are down about 650 points (around 4%).
And now it is 511 down (10:06 am EDT). Here’s the 5-day so you can see the dramatic fall this morning.
This was not unexpected. China virtually lost all its gains from the past year last night (it went down 8.5%). China’s stock market is plummeting. You know how people are about Greece being totally bankrupt? Well, China has lost the equivalent of 15 Greeces in market capital…. just in the past three weeks! I won’t get into the details, but basically, China’s stock market is based on debt, and the Chinese government has an monetary policy that has propped up its stock market falsely. The Chinese government used monetary policy, state-owned banks, local governments, and other tools under its control to push internal investment. The result was a massive buildup in factories, highways, airports, real estate, and much more. Some of these investments were wise. Many weren’t. China has become famous for its profusion of empty stadiums, skyscrapers, and even cities. They were able to do this because the average Chinese investor is illiterate and has bought stocks on debt… because the communist government has told him to. The result? A stock market boom, that eventually ended up with a lot of overcapacity and bad debt. In other words, the value of a Chinese company is not accurately reflected by its stock price, which is the only way a stock market can work.
Usually, when one market goes down, the other markets do as well, because of the multi-national aspect of the world economy. But the crash now has less to do with the Chinese market than fears of Chinese political upheaval. If the Chinese economy goes really south, and factories close and people lose their life savings, the people will uprise like they did with the 1989 Tiananmen Square protests. This is bad news for many multinational companies. So many of our high tech products and clothes are made in China (despite the human rights abuses and the deplorable rape factories and slave labor factories). So political unrest in China gives rise to unpredictability, and that’s why our market struggles.
Analysts are saying to ride this out, which is what most of us with 401(k)s are doing, since we have no choice.
Crude oil hit a new low this morning, too — $38.13 a barrel. That’s due to OPEC nations like Saudi Arabia pumping oil into the economy, and U.S. fracking which is at an all-time production high (and why Oklahoma has so many earthquakes). What does that mean to you?
(1) Don’t be surprised to see gas prices fall below $2.00
(2) Don’t be surprised to see this economic slump last a while.
UPDATE: As of 10:22 am EDT, Dow is down only 316 points (or 1.9%). Could be people taking advantage of low stocks from earlier. In any event, volatility seems to have slowed down and things are settling down. The hit wasn’t that bad…… so far.
UPDATE #2: Still around 2% down, so…. no biggie really. Thought I would share this chart with the admonition not to panic. Why not? The drop pales in comparison to all the gains the market has made over the past decade.
UPDATE #3: Dow started tanking toward the end of the day. It closed down 566.47, or 3.58%. Not the worst day ever. Comparable to Friday.