Monday, April 19, 2010

Witch Hunts and Atypical Recoveries 

Friday's civil suit launched by the SEC against Goldman Sachs maybe about seeking truth, justice and recompense. Let's say I have my doubts. In any event, this post really isn't about the merits of the SEC's case or about Goldman's defense. I don't think either matter much.

In a parallel thought, however, I would suggest we are experiencing an unusual economic "bounce," especially in the capital markets. Equity and credit markets are extremely liquid again, and at low capital cost. In fact, and as distinctly opposed to historical economic recoveries, our markets resumed their exuberance at price levels rivalling peak activity (especially credit). I am in the investment business, and let me say that, while we were active buyers in the first half of 2009, we are active sellers today. Why? And what does that have to do with Goldman and the SEC? Or a volcano in Iceland. Or Greek bond spreads?

Central bankers around the world, led by the US Federal Reserve, liquified what were parched capital markets. To use another analogy, global capital markets froze and they applied the blowtorch. Like it's never been applied before.

And it worked. Too well perhaps. Never have memories been so short. And so now our capital markets participants are back at trying to make money again.

And yet...we have signs of continued contraction directly in front of us, aided and abetted by political witch hunts aimed at providers of liquidity (those would be banks). Europe's economy, hardly a picture of health, beset by fiscal disasters in Greece, Portugal, Spain, Ireland and even the UK, faces a pending currency crisis. Europe's so unlucky, first Iceland's banks collapsed and needed an English rescue, and now its volcanoes are firing back. Our own economy, struggling with historically high unemployment levels, faces unprecedented tax increases. And eventually our Fed will have to take away the blowtorch.

All of this is simply to say, be very careful. Markets and economies struggle and contract due to multiple factors - it's never one thing. But you have before you the recipe for a reenactment or continuation of that which we experienced in 2008 and early 2009.


By Blogger MTF, at Mon Apr 19, 11:28:00 AM:

Small company owners are pessimistic about the economy, because revenue still is lagging, even while large companies are seeing the top line start to grow. Is that because there is a lag for smaller business? Or, could it be that very large companies respond well to liquidity infusions and easy credit? If the former better explains the situation then we're OK, but if the latter is the better explanation then we're in trouble. Once the Fed tries to tighten credit the full effect of the crazy tax increases will be felt. Ongoing unemployment, maybe getting worse even, and economic stagnation will be the result.  

By Blogger Viking Kaj, at Mon Apr 19, 12:34:00 PM:

What is crazy is leaving those who created the mess in charge of the clean up.

Or am I the only person who thinks re-inflating the bubble is a dumb idea?

The people we should fire are Benanke and Geithner. Talk about perpetrating a fraud on the American people. If it wasn't for sovereign immunity all of these people would be indicted for perpetrating a Ponzi scheme called the Social Security Administration. The only way we can keep having these bubbles is if those idiots miss inflation. I don't think they could recognize a bubble if it bit them.

If the economy was a house of cards in 2007 & 2008 what do we think it is now?  

By Blogger MTF, at Mon Apr 19, 03:54:00 PM:

Deflation is still our greatest threat, but kindly motivated excessive government intervention is our clear and present danger.  

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