Wednesday, July 08, 2009

Equity markets reflect pervasive lack of conviction

Technology, financials, materials, energy, transportation, and equipment stocks are reeling. Basically anything having to do with growth is leaking, while fast foods and discount retailers are resiliant. This is a direct reflection of the market's growing loss of confidence in the effectiveness of any government stimulus initiatives.

Stimulus money to date has been spent to supplement state budgets for education and social services, to enhance federal transfer payments, and to prevent cataclysmic break-downs of AIG, Citigroup, Merrill Lynch, GM, and Chrysler. Most of this is necessary, but it is not stimulus. It allows already existing businesses, programs, and supplements to stay in place and survive the economic crisis. Stimulus in the sense of new spending for infrastructure development, green projects, small business development, rural and inner city entrepreneurial initiatives, or any other new growth development is for the most part all talk, all plans, no spending, no stimulus. As the world's largest consumer economy flounders amid dysfunctional execution of its stimulus plan, the world markets follow, and now we are again in a low volume equity market globally that lacks any enthusiasm.

Why the dysfunction. Why can't anything get done. How can administration officials and some Democrats in Congress possibly be calling for a second stimulus package when there has yet to be any "stimulus" from the one passed in March?

Is it simply the result of dysfunctional bureacracies built up at the federal, state, and local levels over many years, bureacracies in which delegation is limited, red tape is ubiquitous, and initiative is a path of much more risk than reward. Or can this culture have seized up in a way that's deeper than that, one reflected in the television shows that are watched, the reality show fixation, the lowest common denominator news programs that focus on entertainment rather than analysis, or the fiction best seller lists that are dominated by books written generally at a sixth grade level, entertainment for many but radically different from the middle of the last century.

Maybe that's a stretch and the key is the polarization of politics, the inability of Republicans and Democrats, liberals and conservatives, libertarians and fundamentalists, or whatever groups one chooses, to seek any common ground, and to hold not just differing views from each other but to be stridently hostile in supporting positions, positions that are more intuitively based resentment in one case, entitlement in another, than ones based on any thought process.

If the U.S. can pull out of this summer malaise, the world will follow. If the autumn just brings more talk and more delay, with stimulus efforts forecast to take hold by mid-2010, the market will not discount future cash flows in which it has no confidence. Stocks will languish.


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