Can the DJIA at 10,000 Inspire “Animal Spirits?” 

• By KATHLEEN M. McBRIDE

That’s because, although we cannot predict whether this is this should be a selling point or not, obviously we all breathe a sigh of relief that our portfolios are a bit merrier at DJIA 10,000 than DJIA 6,547. It almost doesn’t matter whether it’s logical or not; seeing the DJIA cross above that 10,000 mark gives people confidence that even if there is another leg down they will see a five-figure DJIA again sometime. That’s important. After the past two years, this is a welcome sign.

This doesn’t magically stop the outflow of jobs, of course. But what it can do is help us remember that the recession we are in is not permanent even though it may be pretty long-lasting. Even though the bond markets are still not normal, and thought there are, of course, opportunities there, this shows some faith in equities. Since there’s more inherent risk-reward in equities than bonds—at least in normal times—that’s saying something—the equity markets may be more healthy than the credit markets at this point.

What can a simple thing like DJIA at 10,000 do? Well, when portfolios are filled with equities that are not down 40% or 50% or more, people feel like the can maybe buy that item they’d been waiting on—whether it’s a car or a washer or a winter coat. The collective intake and holding of breath abates, somewhat. If enough people feel that way, consumption starts to creep up. Your client’s businesses will be able to sell what they make or serve their customers. They will have customers! That’s a real green shoot because real consumption will help create real jobs, which will lead to fewer homes being thrown into foreclosure from jobs lost. You get a bit of the upward spiral instead of the downward “death spiral,” to use a favorite skating term.

It’s the kind of thing that could—could mind you—awaken the “animal spirits” in humans that John Maynard Keynes wrote of during the Great Depression, and Robert J. Shiller and his co-author, Nobel Prizewinner George A. Akerlof, write about in their book, Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism, (Princeton University Press (February 18, 2009).

Dr. Shiller, professor of economics and professor of finance at Yale University, spoke at the Family Firm Institute’s Annual Conference in New York in September. In an exclusive interview with Wealth Manager, he told me that he was concerned about what it would take to get confidence going again in this economy. You can listen to a Podcast of that interview. He is also concerned about the number of homes under water, in foreclosure, and being forced onto the market. This does seem to be one of the biggest issues and one that doesn’t seem to have been adequately addressed. Yet.

In his book The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It, (Princeton University Press 2008), Dr Shiller calls for an entity akin to the Home Owner’s Loan Corporation of the 1930s. The government-sponsored Home Owner's Loan Corp. took homeowners in trouble and totally changed how mortgages were handled. In the 1930s, mortgages were not the 30-year, fixed-rate type we have today. They were often a five-year term with a balloon at the end. (Sound familiar?) Home Owner’s Loan Corp. converted these loans into 12- or15-year or even longer fixed-rate loans. It is interesting to note that The Home Owner’s Loan Corp. was profitable over the long term. Maybe there is a lesson to be had from this 1930s institution. 

But, back to the DJIA at 10,000. It’s is a significant event foreven  the most rational, reasonable investors. Not that this is a time to jump in—or out—that’s not the point. The point is: Maybe this will help.

Note to readers: You may not hear much from me for the next week as I will be away at Wharton’s Investment Strategies and Portfolio Management program. Back on Oct 26.—Kate McBride 

Comments? Please send them to kmcbride@wealthmanagerweb.com. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.

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