Saturday, June 04, 2011

It's always the same feeling...

When financial markets begin to get difficult there is always the realization that today's price is just that, and nothing that happens the next day has any relationship to some former baseline. It's the existential market thought.

Here we are again, not so dramatic yet but certainly offering that familiar feeling of uncertainty. Anything can happen in an area where that illusive term "confidence" rules, but today's market has none of the potential calamity attributes of the fall of '08.

There are no major financial firms in danger of collapsing and corporate profits are for the most part growing at well managed firms. There will always be poorly managed firms but they are not a barometer of the market unless in the majority, and they are not at present.

There are three distinct reasons why this month is different from two months ago. First, one of the world's four largest economies suffers from a catastropic earthquake and tsumami that disrupts its power supply and makes a large region potentially toxic. Japan is a part of the supply chain for automobiles and technology that is now a high value added producer. Japan makes things that cheap labor in China and southeast Asia does not. That has affected manufacturing output globally, and likely will no longer be an overhang by the fourth quarter of 2011.

Second, the U.S. has had an amazingly lousy weather season this year. Major floods all along the central midwest and south are at levels not seen since the 1930's. Tornados and storms have been more frequent than at any time since the 1970's. Then there is the residual economic drag from the gulf spill, both to fishing and tourism, that weakens a vulnerable area.

Third, the lingering impact of the great recession still inhibits market participants and causes the still prevalent avoidance of risk by many to move to the extreme rapidly when the market looks unsettled.

These three reasons for market weakness will all pass. The marginal weakness in jobs and once again in housing are both follow-ons from these concerns.

There are issues that can be troublesome for sure. The new aggression of the government against corporates and the overstepping of individual civil rights is disturbing. The whistleblower awards are simply inviting corruption for payoff and the widespread wiretapping and taking sets of words out of context to force plea bargains and tainted testimony is hideous. Obama and Levin's resentments are not the stuff of healthy capital markets and they could care less. Some more stringent regulation of securities law can be a good thing(SAC scrutiny is long, way long, overdue) but bending rules for enforcement actions can be a slippery slope for our democracy.

Another issue rarely mentioned in the slowdown now is the move away from the Bush era's see no evil approach to immigration enforcement. Immigrants, legal or illegal, fuel growth. They do things, make things, buy things, and add to the economy. They always have. With more enforcement and criminalizing hiring even by unknowing companies, there is now an end to that growth component. Obama has kowtowed to the rigid xenophobes and not succeeded in getting any concessions for citizenship and rights for long time residents.

Those are creeping, creepy, issues. The "debate" over the debt ceiling is not. There is zero benefit from the current impasse and showmanship. There is simply not any sane leeway at the moment to make dramatic spending cuts and there is too much risk to curtailing normal debt service and government services in August. Tax increases for the richest somehow are not possible but we have a completely screwed up tax code that could be rejiggered to be simpler, more fair, and raise more money without any change in the most well known benchmarks. That would require work, not political posturing, to accomplish. Hell, let's just have some Captain Crunch and watch a Law and Order rerun, and then get some shuteye. All this political stuff leaves no time for constructive work, and the whole World sees our lazy asses.

QE2 ends soon. We all know it and that's a good thing. An almost zero interest rate is good for the government and no one else. Look at Japan. We need to get beyond the natural disasters and climate disruptions, focus on corporate profitability, and move beyond the politics of resentment and self-righteous phony Americana. Will that happen?

Probably it will. We still have more luck than we deserve. We have problems but the U.S. still functions more reliably than most countries. That might not be the case ten years from now, but it still is today.


Anonymous Anonymous said...

Right on it seems to me, but I'd like this commentary even if I didn't agree.

10:28 AM  

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