On September 15, 2008, I was watching the Economic Apocalypse live on CNBC, as AIG created a vortex that sucked Capitalism into a giant hole. Rick Santelli was screaming that banks should die in a loud, grotesque, horrid manner. Jim Cramer was practically rioting for a run on the banks (see video at the end). It was great drama!
I didn’t think that the world was going to end, but I knew (and had for some time) that it was going to be really bad as people starting to pay attention to the VIX. Watching the VIX is like watching the fuse on dynamite. You know something is going to blow up. By 2007, the VIX chart was like a schizophrenic on LSD.
So five years later, and there’s still no recovery, except on the Dow. President Obama plans on making a speech on this anniversary, no doubt going something like this: “We have a long way to go, but the economic picture is just great.” Except it’s not.
John Maynard Keynes is probably sticking to his coffin because everything is so “sticky”; sticky GDP growth with “sticky” high unemployment, sticky (low) wages, and a labor force participation ratio at the lowest in history (Ratio 3:2 with U6 = 14.2%). People are demoralized, and they’re hurting. People are “stuck” from all the stickiness.
It just gets weird from there. All the Economic rules have changed, and they’ve been changing for a while. Here’s one great example:
Traditionally, there has been little to no correlation between the Dow Jones Index and Unemployment rates (r2 = 0.07) in recession recoveries – except in the 1992 recession (more on that in a minute). However, since 2010, the correlation between the Dow and Unemployment is r = -0.94 (r2 = 0.897).
(For the back of the mind: in today’s world, lowered unemployment does not even come close to meaning that people are returning to work. It’s more like people are giving up looking)
That’s right!! For every unit of Dow increase, there is a new job created!! Great news, right?! Except it’s not; there’s a 3:2 work ratio, U6 = 14%, and did I mention “sticky” wages? Here’s how it looks on a scatter plot (and it’s weird!):
So what gives in 1992? The recovery from the S&L crisis of the late 1980s. Keep in mind that the S&L mess was not fully cleaned up until 1995. In other words, the last time Unemployment negatively correlated with the Dow, was during (a-hem) a banking crisis.
Then things went back to normal, and by 2006, the correlation started creeping back in. Why? Because masses of over leveraged people started defaulting on their mortgages in 2006, which didn’t hit the over leveraged banks until 2007, which didn’t take them down until 2008; 5 years ago today.
And then there’s Jim Cramer, who predicted all of it back in January 2008, when he complained that the banks’ balance sheets, along with their insurers, were pure fiction. He damned near had an aneurysm telling people to get out of “financials” – in other words, make a run on banks.
I remember when I saw the Cramer clip live; my question as to why the VIX chart looked like an inkblot test was answered: