Wall St. Made of Pennies

The numbers on your screen might look familiar, but much has changed since the Dow was last where it is now.

Sure, the banks are still broke, people are still losing jobs, home prices are still falling, manufacturing is still grinding to a halt and factories are still going out of business. And of course the Feds are all still busy “doing something.” But some things have changed.

Two new companies find themselves at home on the Dow Jones Industrial Average, for instance. The Travelers Companies Inc. (TRV) and Cisco Systems Inc. (CSCO) now eat and sleep where General Motors Corp. (GM) and Citigroup Inc. (C) used to live. General Motors, as we all know, was forced to move to a smaller, less comfortable crib, closer to public transport lines so it can take the bus to bankruptcy court. Citigroup, meanwhile, will be selling pencils from a cup on a street corner near you… at least until it can raise enough for first-and-last-month rent.

Another thing that changed is the amount of money allocated to fighting the natural tide of the market. At the turn of the year people thought $700 billion was a lot of money to hand over to whatever companies could lose it the fastest. Now the wonks reckon the total bill will come to around $14 trillion, or about equal to the entire GDP of the country.

But one should never underestimate a politician’s ability to underestimate the cost of something. In March they told us the budget deficit would be about $1.2 trillion. A few months later and that figure had ballooned to $1.8 trillion. Now, $600 billion might not seem like much when it’s someone else’s money, but it sure is a lot when you’re that someone else. And, unfortunately for taxpayers, they are always that someone else. The $600 billion “adjustment,” just for reference, is larger than any TOTAL budget deficit in history.

For those of us who don’t deal in trillions of dollars every other weekday, here’s another way of imagining that amount of money: At 37 million cubic feet of space, the Empire State Building is capable of holding roughly 1.8 trillion pennies. So, just stack one hundred Empire State Buildings and you’re looking at the deficit, one penny at a time.

Change can be a good thing, of course. If the government SAVED 100 Manhattan skyscrapers worth of pennies, for example, that would be a good change. If the economy ADDED half a million jobs per month, instead of losing that many, we would welcome that as a change for the better too. It is positive change we can see – change we don’t have to “believe” in – that we’d really like to see driving the market.

Whether stocks lose a couple of thousand points from here – as they did in the first few months of the year – or gain a couple of thousand – as they did over the past few – is anyone’s guess.

Plenty of people will make those guesses too, so just for sport, here’s ours: stocks, as a whole, will do both those things, but probably in reverse order. First we’ll see them climb, maybe not all the way out of the muck, but high enough for people to believe that they’ll never fall again. Then, when enough people believe the unbelievable, they will fall, possibly harder and faster than they’ve ever fallen in their life. Then, like a goldfish mistaking his reflection for a brand new friend, people will believe the unbelievable all over again and tell you stocks will never go back up.

Of course we could be entirely wrong. (It happened once in 1993 and then once again in the summer of ’98, so it COULD happen again…theoretically.) In any event, we’re certain to end up with more money or more humility. Either one would be nice.

The Daily Reckoning