The biggest U.S. bank, Citigroup, says third quarter profits are likely to drop by 60 percent from a year earlier, as it writes down the value of billions of dollars of loans tied to its leveraged buyout and subprime security repackaging operations. The news arrives just a few hours after the huge Swiss bank UBS reported billions of dollars of credit-related write-downs, and its first quarterly loss in nine years.
In response, the Dow Jones industrial average surged back over 14,000 by midday Monday.
Even the Wall Street Journal is perplexed by this. Justin Lahart writes: "The stock market is often seen as a leading indicator of economic growth. But there seems to be a disconnect here, because the economic outlook sure doesn't seem bright."
Lahart speculates that the decline in value of the dollar has boosted U.S. exports, which might be cushioning the blow delivered to the economy by the housing bust. Another theory is that the flow of financial reports from big financial institutions is providing long-awaited "transparency" about what actually happened over the last few months, encouraging investors to be less afraid of a full-blown meltdown.
Here's a third possibility: The traders who have been betting so exuberantly on a rising stock market tide ever since the Fed's rate cut probably aren't worrying too much, in their daily lives, about resetting ARMs, or foreclosure notices, or the trickle-down effects of $83-a-barrel oil, or the sustained price hikes in food staples across the board (and across the world). So why worry? Yes, this is a standard class-war analysis, but it's hard to come to any other conclusion when even Alan Greenspan is warning there's a 50 percent chance of recession, and yet the Dow Jones industrial average continues to flirt with record territory.
Here's something Wall Street should think about. If a recession does occur in the next 12 months, it will be happening during a presidential election year. That will be very bad news for Republicans, not to mention the kind of laissez-faire anything-goes deregulated capitalism we have become so accustomed to in the past decade, or three.
So party on. While you can.