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Some very unpleasant things have happened in the markets since Obama won the election. Equities are down about 20% and gold prices are up over 30%. That has to be the most devastating rejection of a new president's policies by any market in recent memory. Investors are voting with their feet, running away from equity risk and into the comforting arms of gold. Come to think of it, since Obama's chances of winning the election started to rise meaningfully by the end of September, when the S&P 500 was trading around 1200, we could say the Obama presidency has cut equity values by fully one-third.Those who voted for Obama would argue that he hasn't done anything yet, but the economy has collapsed and it is therefore the growing threat of a global depression that is responsible for the decline in equity values and the soaring price of gold. Things will get better once the spending bill starts to kick in.
At this point everyone is entitled to their opinion, since no one can know precisely what is driving the market, but I think the market is forward-looking and has decided that the "stimulus" bill is not going to be stimulative at all. Furthermore, I take the view that the bill that Obama will be signing today represents the sum of all the market's fears about an Obama presidency: e.g., bigger government, more income redistribution, more regulation, universal healthcare, subsidies for expensive energy sources, price fixing, abrogation of contracts, salary caps, industrial policy, protectionism, etc. There's enough hostility to capital and free markets in this bill to make any market and any rational investor deeply depressed.
A good friend, Eileen Leech, offers a somewhat less partisan view of the mess we're in: "maybe the new socialism didn't cause all of the hole we're stuck in, but it has definitely taken away the ladder."
There's a lot of wisdom in that metaphor. Bad policies and more government spending don't necessarily mean the current recession will turn into a depression, but they do mean that the economy will most likely grow by less than it otherwise could in the future. (For example, Brian Wesbury talks here about how every extra percentage point of government spending reduces potential GDP growth by 0.2%.)
In any event, the question for investors is not who or what caused the mess, but whether all the bad news is fully priced in or not. I still think it is.
I have been highlighting for the past few months a number of indicators that show definite (and in many cases huge) improvement over the past few months: the rise in the Baltic shipping index, higher prices for most commodities, lower swap and credit spreads, lower implied volatility, a declining TED spread, rising T-bill yields, rising TIPS spreads, rising Chinese and Brazilian equity markets, coordinated and aggressive central bank easing, and rising home sales. If we've seen most of the bad news and are nearing the bottom of the recession, as these indicators suggest, even awful policies should not prevent some recovery in equity values. I think the market is still fearful that we're on the brink of a deep global depression, so if the reality falls short of a true nightmare, it will be good news.
7 comments:
Scott-
Sadly, I agree. We have precisely the wrong leadership for the times. Any sane leader would say all bets are off and let's try to restore normalcy before we embark on major changes, but we are getting more uncertainty thrust into the environment everyday from government. Investors are rightly hiding underneath their desks, b/c we are scared s*&$less. The dream team of economic and business leaders that were paraded before us during the campaign (Volcker, Buffett) are MIA. Justifiably, the monied world now thinks that Pelosi, Dodd and Barney Frank run the country. Credit will be scarce, energy will get scarce, regulation will increase costs and employment will stay weak.
I am long energy, basic materials (China can't afford to slow down, they will give us a schooling in how to do stimulus) and short US Treasuries in a big, big way. Basically I am short the US until we get gridlock in Washington. At best that is two years away.
Then based on your indicators, the market is really liking the Obama policies, no? How can what you say be true at the same time that your indicators are continually improving over this same stretch...I am baffled!
Don't get me wrong, our governmetn is abysmal, but at the same time so is corporate America. There are no good leaders in either space...
Scott, I appreciate your list of positive indicators, they are helpful to maintain a hopeful perspective. I don't know if this is "straining at distinctions" but even with these various positive indications, I wonder if you are looking for some final "catalyst" that will finally move the markets back on a positive track. I guess I am hoping it will not have to be the hope for gridlock, which is almost two years away.
The indicators I cited are almost all tied to the grass-roots fundamentals of the economy. If freight rates are picking up, then activity must be picking up; if home sales are surging, then prices must have fallen enough to stimulate demand; if implied volatility is down, then investors must be a lot less nervous.
These indicators say nothing about why the equity market is depressed; they say nothing about psychology or whether the market likes Obama's policies. They are focused on what's going on in the real world, and most of them show things are improving on the margin.
What might be the catalyst that gets the equity market to take notice? Sometimes it's just the accumulation of facts that finally reaches a tipping point, when the market suddenly realizes there has been a change in trend. Already we see that as the bad news piles up, prices don't succeed in making new lows.
If there were evidence that housing prices had definitely hit bottom and were starting to rise, that would almost surely be a positive catalyst.
If 3-mo. T-bill yields got to 1% that would be a catalyst, since it would signal the Fed that higher interest rates were in order and quantitative easing was no longer necessary.
Scott,
I read Mr. Westbury often and in particular like his work and opinion on Mark to Market. I just don't understand why the Treasuary Dept. woun't try a suspension or elimination of these very disructive rules. They seem to be throwing everything on the wall to see what sticks and the one thing that would cost nothing, and has some sensibility to it has not even been discussed. Could it be that the politicians don't want to admit they were a cause of this situatuion?
Bobby
bobby: I'll be cynical and say that the politicians avoid simple solutions like changing the mark to market rules because that way they can feel important; the more complex the solution the more brilliant they must be. I too wonder why they can't try a simple adjustment to the rules. The FASB people were discussing this, and might have done it with only a little bit of encouragement from the pols.
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