Question for Economics Experts (or Blowhards) (UPDATED 1/26/08!)

Jan 25 2008 Published by under NIH Budgets and Economics

Here's the final industry breakdown for today's Dow at the close:

Sector Change
Basic Materials +0.48%
Capital Goods +0.16%
Conglomerates -0.56%
Cons. Cyclical +0.37%
Cons. Non-Cyclical -0.47%
Energy -0.30%
Financial -1.31%
Healthcare -1.36%
Services -1.20%
Technology -1.15%
Transportation -0.09%
Utilities -0.71%

This was the aftermath of a substantial sell-off with heavy volume. Now I know this is just one day, and I'm certainly no economist, but if you take today's changes seriously, doesn't this look like the beginning of a hard-asset bubble?
Let's hear from people who know (or think they know) about this kind of thing.
UPDATED BELOW THE FOLD ON 1/26/08!!


UPDATE (1/26/08):
Apparently, someone who, unlike PhysioProf, ought to know what he's talking about is also concerned about the possibility of a hard-asset bubble resulting from further rate cuts:

The Fed action is not to everybody's taste. Stephen Roach, the head of Morgan Stanley Asia, was blue in the face from righteous wrath in Davos today.
"Policy-makers are reaching back to the same play book that created this mess in the first place. They're saying we are there to clean up after bubbles burst first rather than to prevent them. It's a dangerous, reckless and irresponsible way to run the world's largest economy."
"We have a market-friendly Fed injecting a lot of liquidity in the system which will set us up for another bubble economy. Excessive monetary accommodation just takes us from bubble to bubble to bubble."

(Via Ambrose Evans-Pritchard, h/t Agonist.

11 responses so far

  • S. Rivlin says:

    I do not know or pretend to know the cause(s) for the slamping economy. I do know that the war in Iraq has drained our coffers and we have borrowed heavily from our trade partners to pay for its sustenance. We now also are going to borrow $150 billion more to give to whining Americans who for years have drove gas guzzling vehicles and do not want to give them up when the price of gas is topping $3/gallon. Combine these with years of outsourcing jobs and services and what you get, I assume, is an economy that since 9-11-2001 has been artificially supported by extravagant spending and consuming of goods made in China. The $150 billion give-a-way aims at prolonging the mirage of a strong economy. All that has been good for the Chinese and bad for our economy, which now seems to come down to earth.

  • natural cynic says:

    Looks a little bit like those who are selling Financials and other sectors are looking for somewhere to put their money.

  • Brian Macker says:

    No.

  • Lance says:

    I guess I'll be under the blowhard category.
    If you want to watch something real entertaining, I suggest you watch the base-jump that the Hang Seng performs every time the US economy looks like it is going into recession. MLK day was certainly entertaining, watching their market selloff %5!(only to gain it back!).
    Speaking of bubbles, China's entire economy has been massively overinflated and has little or no oversight. Many of the valuations on companies are purely speculative.
    I have no idea what's going on, but I think "Stagflation" will become the word of the year. 2008 is looking to be an awful lot like 1980 (high gas, slipping economy).

  • MattXIV says:

    If you look at the 1 month tends, the sectors that are up today are tracking the S&P 500 pretty well. For example, the 1-day on Basic Materials looks like part of a dead-cat bounce back to around -10% from the reference point after it bottoming out a being -14% from the reference point.
    I'm more blowhard than expert, but I'd think a new bubble would be unlikely in the current environment, since we're in the constriction of credit due to the housing bubble popping. Bubbles form when there's easy credit and can be popped by credit being restricted.

  • Who Cares says:

    Precious metals are in the basic materials category. People are fleeing into the traditional safety of gold and silver because they think USA is going to hit a recession soon and unless something miraculous happens it will turn into a depression. They are right about that (which is why there will be no new bubble since the old ones are finally being deflated)
    Then there are rising prices in the world for most other basic materials due to increasing demand from China and other developing nations.
    This makes the producers of these materials interesting to invest in.

  • PhysioProf says:

    If the Fed keeps lowering interests rates, and people are "fleeing" into hard assets, such as gold, silver, and other raw materials, doesn't that create the right conditions for an asset bubble?

  • Fernando Magyar says:

    This makes the producers of these materials interesting to invest in.

    May you live in interesting times. Not sure if there is a pun in there somewhere.
    The Universal Mining Machine
    http://europe.theoildrum.com/node/3451#more

  • c says:

    Not really. You're going to see a lot of volatility as people figure out where the hell to put money.
    To make the bubble case you'd have to look at longer-term ratios like price/earnings. The sure sign of a housing bubble was a rise in the % of the pop owning houses and large increases in house values in proportion to incomes.

  • olivaw says:

    I think you already realize the answer to your own question: as a general rule, you shouldn't interpret one day's results for stock market averages as meaning much of anything. The general rule applies here.

  • Who Cares says:

    The update is correct that one of the requirements to start a bubble is an easy monetary policy.
    However currently there is a road block in that the lenders are afraid, unwilling or unable to make use of the easy money offered. This due to them not knowing where the next hit from the mortgage defaults will come. This requires them to keep buffers in case they are the victim and increases the threshold for lending to others. Also write offs mean that the lenders do not have as much assets as required by law so they can't lend as much or pay back short term loans they make when they are temporarily out of money to make transactions.
    This can (and in my opinion this is currently happening) result in a downward spiral due to borrowers being unable to get the assets required to pay of debts which then have to be written off, etc..

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