Policy overhang on the market
Many analysts looking at market weakness in recent weeks have seized on the lackluster economy. This is, truly, a lame recovery. But I'm not convinced this is what's bothering Wall Street.
Markets strive to look ahead, and usually succeed. It's part of what makes the market so valuable: Today's price of companies that will be engaging in a stream of economic activities over many years gives us a useful, digitized readout of what millions of people (investors) think will be happening for weeks, months, even years to come.
So what is weighing on The Market? It's always dangerous to read the mind of an abstract thing that you've just artificially personified, but for my money, a big factor is the current policy-political overhang in the US.
1. Will the Fed raise interest rates, keep them the same, or even cut them, at the June 21-22 FOMC meeting? The question isn't just about that next 1/8 or 1/4 of a point, of course. We're at a turning point, or a potential one. Eventually, the recent pattern of rate cuts will come to an end. When it changes, the Fed will be raising rates for up to several years.
2. What will happen to the debt ceiling? No, I don't mean, "will they raise it?" They'll raise it. They always do. But the devil, or -- let's keep the optimism here -- the angel is in the details.
Will Obama cave, and slash spending? Will Republicans cave, and keep the government operating at any cost? Or will there be a meaningful compromise? Especially, what shape will it take, and what sort of policy-making relationship will come out of it?
Early in Bill Clinton's term, the election of a Republican Congress created a half-decade of triangulation and, honestly, pretty good policy-making. We actually cut spending, a bit, and, of great importance, reformed the welfare system. We friggin' balanced the budget -- ! -- even though my 14-year-old son refuses to believe this.
On the other hand, split government under Bush and the Pelosi Democrats, similar in some ways to the Nixon-Albert collaboration in the 1970s, produced a surge of new domestic spending, irresponsible Fed policy, a bipartisan failure in bank regulation, and new or continued wars all over the globe which the Democrats criticized but funded,
What will issue forth from the Obama-Boehner two-step? Will we have the policy mix of 1971-1975, or of 1993-1997? There's a big difference there -- and if the market is being cautious partly because it's waiting to see which way we go, it's not only understandable, but wise.
3. We also have a U.S. presidential election taking place; the Arab Spring; the collapse of Greece, possibly Italy, and who knows, possibly the E.U. itself.
Now, to be sure, there's always something. Election, Fed vote, battles in Washington. But what's distinctive about recent weeks is, we really do have a number of seminal events in the making... inflections (or, maintenance of trends) that are likely to remain in place for some time. When the Fed starts raising rates again, it will be at it for a few years. A debt ceiling entente will set the tone for the next 3-5 years. The Middle East could be pacified and democratic, or back at war again, within a year. As the world learned in 1989, a la 1789, when aging totalitarianisms fall, they often fall quickly.
"If there is no solution, there is no problem," as Moshe Dayan so wisely put it. There's a profound wisdom in that which enables us to economize on our time and focus on conditions that can be changed for the better.
Sadly, I'm right about the mind of the market, it's probably not a very usable piece of information by investors: If there is no way to invest the information, the information doesn't matter.
But no learning is ever lost, and understanding a situation always brings some value. One of the keys to investing, as Jesse Livermore makes clear, is managing your emotions.
If this little thesis about the markets is right, we may be in for a few more weeks of turbulence while Ben Bernanke, the Saudi Royal Family, Messrs. Obama and Boehner, and the other great potentates and aristocrats of our day, decide what is to be done. Investors can either keep their cool and await more decisive signals from politicians and the market, or we can panic, and change everything we've been doing in mid-stream. I vote "stay calm."
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