Economy and Market: A Help Wanted/Bid Wanted Cycle

I lost a lot of money in the market and I'm feeling sooo bad.

Well, truth be told, I didn't lose any money because I didn't actually sell anything, but my brokerage statement isn't going to look as good at the end of this month as it did at the end of last. And I'm feeling sooo bad.

The market is down so the economy is going to fall apart and I'll lose my job, so I'll lose my house and the kids will go barefoot and hungry and I'm feeling sooo bad.

Wait a minute. Can we lighten up in here? We're off to a fair start if we're scribbling lyrics for a country music lamentation, but as economic analysis goes, we're going nowhere.

The Nasdaq 100 is 25% off its high of four weeks ago, and to hear some pundits tell it, that means Western civilization is in deep peril. Anything that causes the brokerage statement to look less good will shatter the fragile confidence of the stalwart managers of households and businesses who have propelled this economy into its present accolade-winning condition. Through realized losses surely and paper losses maybe, a downturn in the market will cause a retrenchment in spending that will have a boat anchor effect on economic growth, and the whole delicate fabric of the soon-to-be dearly departed recent delightful past will come unraveled.

What sort of nonsense is this? It suggests that the whole of the U.S. economy, the entire mighty fortress, is led around, as if by a nose ring, by the manic moods of the market. (No, I don't know what proportion of homemakers and business managers actually have nose rings -- this is not an econometric argument.) This Chicken Little outlook is founded in the self-absorption and self-importance of people who work in and around the markets, as differentiated from normal people with real jobs.

It's a wealth-effect thing, I take it. The market is down so my brokerage statement is uglier so my spouse will cut my allowance and, no longer able to afford the finest imported Italian mortadella, I'll have to subsist on plain domestic baloney at lunch. (Baloney is in plentiful supply around here, as you can tell.)

This wealth-effect thing is very sensitive, I deduce, highly precise and extremely responsive. The Nasdaq is down 25% from its high over four weeks, so the Visigoths are at the gates. As it happens, the Nasdaq is up 42% from its level of six months ago, but that apparently doesn't count; it is permissible to measure only from the high-water mark. Every time the market has a sinking spell, the Visigoths go on the attack; they run the floor well, apparently, and may have invented the fast break.

Case in point: Just last Tuesday the Nasdaq rallied through the 3600 level at about 11 a.m. so, full of confidence, I called a dealer and entered an order for the biggest SUV I could find. By noon the market was at 3700, so I cancelled the SUV and ordered a Hummer -- the military model with armor plate and the .50 caliber -- but by 3 p.m. we were back at 3600 so I cancelled the order and bought a bus pass. The holiday-shortened week ended with the Nasdaq at 3505. I guess I'll be walking next week.

What am I bid for a Hartford bus pass?

In fact (or in my opinion, which amounts to the same thing -- in my opinion), the pundits have the polarity tail-end to. It isn't the hysterics of the market that move the economy, it's the economy's subtle mood shifts that stir the market. The market is pathetically anxious for the economy to do well, to feel well, to be well and stay well. An economic chill is not good -- the market had panic attacks in 1997 and 1998 when first Asia and then Russia triggered concern that perhaps the economy would catch cold. When those fears proved unwarranted, the market's relief was explosive.

Economic fever is no better: The market couldn't be more concerned than if the economy were its first-born child. It sits attendance on every taking of temperature and wrings its hands that the good doctor may have to apply painful therapies in the interests of the economy's long-term health. The market wants the economy to live long and prosper, but it can't stand to see it suffer even for a moment; thus the hysterics.

In its current bedside watch over the slightly feverish economy, the market provides a demonstration that it is the economy that drives the market and not the other way around. I'll call it the Help Wanted/Bid Wanted Cycle.

When the economy gets overheated and Help Wanted signs are everywhere, the monetary doctors step in to cool the patient. The doctors are clumsy, the dosages are imprecise and the medicine is unpalatable. The therapy may be necessary for vitality and longevity, but the whole process is unpleasant and the market, tenderhearted in the extreme, tends to grow ever more disconsolate over the suffering involved. The hotter the economy gets and the more vigorously the doctors apply their therapies, the more morose the market becomes. As the fever climbs toward its crisis and before it can be seen to have broken, the market will often break down completely. It becomes almost totally dysfunctional, unable to raise capital, barely able to transact simple business. Too much Help Wanted in the economy can lead to Bid Wanted conditions in the market.

Last week closed with the market feeling just a bit more hopeful that the economy's rosy glow is a function of vigorous good health and not an early indication of true fever. But that vigor seems to be pushing on toward still more Help Wanted signs -- the unemployment rate looks to be headed toward a three handle -- and that's not a good omen in the Help Wanted/Bid Wanted Cycle. It looks likely to me that the market's period of anxious bedside attendance has only just begun.

Bid wanted on that bus pass.