Monday, July 14, 2008
You want to be careful about trying to derive political meaning from the direction of financial markets. Like all complex, chaotic systems -- think biological or climatic systems -- financial markets are essentially impossible to predict, and it is therefore very difficult to explain any but the shortest term movements. That said, this is as plausible a theory as any:
Investors this summer have been placing their bets on an Obama presidency, and for the most part that hasn't been good for the market.
Without giving him a chance to explain himself in detail on the campaign trail or at the Democratic National Convention, they are voting with their shares by tossing financial, health insurance, manufacturing and high-dividend stocks into the ash can, and are growing skeptical about energy companies as well.
It's not that major institutional investors don't like the man -- far from it. He has many backers among the financial elite, including multibillionaires George Soros and Ron Burkle. And it's not that there aren't many other reasons for investors to sell stocks now, as the global economy tangles with the terrible twin beasts of bank deleveraging and inflation.
It's just that Obama's rhetoric on taxes and health care is scaring common wealthy people with large capital gains from investments made over the past decade, and a lot of them don't want to wait around to see whether it's just populist fluff that might be set aside once he takes office.
Plus, the Democrats who run Congress know that a weaker economy favors their nominee -- and they are loath to pass banking or trade legislation now to improve the nation's industrial standing over fears that it could backfire and give comfort to the Republicans. And finally, there is a well-founded anxiety that one-party rule in Washington for at least the next two years will bring about the sort of abuse of power that has gotten both parties into trouble over the past few decades.
There is something in the last point especially. The tack-to-the-center Barack that we have seen in recent weeks is not so bad; if the Lord on high guaranteed me that the Democrats would lose the Congress in November -- and that would actually require the Lord's intervention -- I would be a lot less worried about the consequences of an Obama presidency.
While there are clearly some connections between what's been happening in the market and the belief thay an Obama win is inevitable, there are a lot of other factors at work as well. For example, it's widely accepted on the Street that the Busch family yielded to the bid for their beer empire because of an Obama pledge to at least double capital gains tax rates; but for every such story, there are continued deep worries about the fragile state of financial markets generally, including those overseas entities as well. The totally unyielding position of the Democratic controlled congress to do ANYTHING about oil supply is perhaps the biggest worry overhanging the market, and it's certainly true that Obama's position on oil issues will weigh very negatively on overall market performance as a victory by him grows more likely (assuming that it does).
While I have no intention of voting for Obama, I can assure you that the financial markets care not one bit about the man at this point.
The markets are tanking because of the insane amounts of leverage in the financial system, leverage that is directly tied to the financial community's decades-long love affair with subprime mortgages.
You simply can not lend billions of dollars to people with poor credit and no ability to repay the debt, then convert those billions into a few trillion dollars worth of leveraged financial products, then sell them to every bank, pension fund, and hedge fund in the world, and then avoid a cataclysmic financial meltdown when the people with poor credit and no ability to repay the debt stop making payments on the mortgages that all of that leverage is built upon.
The stress and strain in the country's financial system is near panic levels, hence Bernanke's willingness to flood the system with dollars, hence the dollar's decline against other currencies.
In short, the financial system hasn't been under this kind of stress since the Great Depression.
Yes, it is that bad out there.
Perhaps this is also why Rush Limbaugh has a record-setting contract: those paying him anticipate an Obama presidency and want to make sure they, not others, have Rush on their payroll for what they may expect to be a golden age for conservative talk radio.
There are two "givens" operating in the stock market. First, the Bush tax cuts expire in 2010 and the capital gains rate will jump, among others, creating the largest tax hike in US history. Secondly, an Obama win would put into question whether you would experience a tax hike in 2009, on top of the 2010 hike that is coming.
Take your medicine now and avoid the pain later.
The Anon commenter at #3 above gets it. But there's one more level to expose: The Fed. Helicopter Bernake is in charge of a system now gone into positive feedback. It's possible it may not correct, folks.
Wall Street has nothing on its mind but the real state of monetary affairs our masters in DC brought upon us, subjects to the unbacked dollar they're now inflating into oblivion. (And remember, inflation is socialized onto our backs, while profits are privatized into their pockets._
As a conservative it therefore appalls me to see the ostensible Right either bemoaning the economy solely under the specter of a socialist Obama Administration -- which is a huge concern, to be sure -- while cheerleading the biggest fraud in history, which is Fed monetary policy under as many Republican administrations as Democrat, if not more.
Unbacked for American citizens at least since 1933, if I recall correctly.
Inflating into oblivion?
Inflation is running between 2 and 4 percent, depending on the measure. Not optimal but not exactly Bolivia, either.
Positive Feedback? Heh.
The only thing funnier than people talking about UFOs at Area 51 is people who pretend to understand monetary policy and banking regulation well enough to carp about the Fed.
It is an opportunity for people on both sides of the aisle to embarrass themselves by revealing their ignorance.
Ever actually take an undergraduate money and banking course, Anon 10:02?
Everybody is an expert, huh?
Well, Hamilton, while I don't typically respond to mere ridicule, I will state that the major indicators are quite convincingly opposed to your, presumably, rosier outlook.
How about we play a little game then: You point me to them, complete with said positive inclinations, and I'll eat my hat.
Go ahead; it'll be easy for an old pro such as yourself.
Point being that you can accuse me of baselessness with your own stripe of baselessness, so how about you show me how it's really done?
I could point out, say, the tech bubble, the commodity roller coaster (it starting when Nixon closed the gold window, but who's counting) the nearly exponential M3, $1.6T in global writedowns in 18 months, a -30% real estate adjustment in major markets, a trio of very high level bailouts in the last six months or so, the 2% Fed rate (remember Japan?) and plummeting nonfarm payrolls, an industrial production index that's approaching 2002 levels, construction off over 50% from '03, unemployment up 2.5% in two years, a overall home price index that's lost almost 30% in two years, owner equity off 25% since the late Seventies (for crying out loud) vehicle sales down some 30%, and on and on.
But the dollar, which is being devalued at a phenomenal rate, is secure. Especially with a nearly exponential number of them added to the system recently. And yes, due to CPI index manipulation under Carter, inflation is three times reports, so maybe we should think about doubt "officials" just a touch.
But I digress. Do you have those positive numbers?
Anon, aside from the popping of the real-estate bubble and the jump in inflation caused by the recent huge rise in gas prices, do you have any negative numbers? Everything you quote seems directly related to those two pieces of the economy, and while they are important, they're not everything.
Anon at 2:20AM, are you blind?
Look, the dollar is being devalued as the former currency standard; it's just that simple. The US has gone from richest to greatest debtor nation in history. There's nothing but negative numbers, and I cited a dozen of them for you.
The entire US economy is based on a unbacked monetary standard and an exploding money supply. To the Fed's credit, it produced an artificial standard of living at the limits of the dollar's ability to create it, but the game is over.
The Right, of which I am a member, really has to return to conservative values, start distrusting the powers that be, and stop hoorahing this neo-Keynesian school of economic theory. This has nothing to do with Obama (but will certainly include the lout if he gets elected. He is a Socialist writ large.)