Rossputin.com: Rational Thinking About Our World

As I write this note on Monday evening, Dow Jones Industrial Average futures are down more than 500 points, with S&P 500 futures down about 60 points.

The Australian market is down 5.5%, following similar or larger losses through most of Asia and Europe on Monday.

The market panic seems to be a combination of recession fear and worries about banks having to write down assets as they revalue holdings tied to real estate, especially "sub-prime".

[It wouldn't surprise me if we see the Fed cut rates in the next few days, in advance of their scheduled meeting at the end of the month, but if the market rallies on a "surprise" cut, that rally should probably be sold...and quickly.]

What I wonder is whether the markets are more likely to predict a recession or to cause one. Same story for mainstream media. Will people hearing repeatedly on TV or in newspapers that the odds of a recession have increased dramatically cause them to restrain their spending, and make the prophecy self-fulfilling?

To answer my own questions: I think the markets are more likely to predict a recession than to cause one whereas I think the media is more likely to cause a recession than to predict one.

I have no idea what to make of professional economists at this point. Some believe the economy isn't as fragile as the media would have us believe. Very few are yet predicting recession, though I believe that will change a lot in the next few weeks. On the other hand, it's commonly said that economists "have predicted 12 of the last 4 recessions."

All that said, Tuesday's likely near-crash in the stock market must have a negative impact on the economy, on consumer spending, on capital formation. While the market is predicting a recession and has been for a few weeks in stocks and arguably for 6 months in bonds, in its own way it will also help cause one.

I, like most of you, am losing a lot of money in my retirement account and other investments. I, like most of you, don't yet know what if anything to try to do about it. I assume that I, like most of you, will be cutting back on my spending in the coming year and doing my part to ensure that the recession actually does come. While I realize that recessions are necessary to squeeze excesses out of the economy and that they're a necessary fact of life in a sustainable economic system, it doesn't mean they're any fun. This one won't be any fun either. I encourage you all to be very careful out there, financially speaking. Don't forget that losing money is much worse than not making money.