Saturday, December 13, 2008

Exhaustion in the Stock Markets: A Necessary Evil

Even to the most untrained spectator, the stock market doesn’t have a clue when this economy will recover. It “reacts.” Everything recently seemed to hinge on an automaker bailout that just didn’t have enough steam to break through the Senate. News comes out. Then the market gives its opinion with a move up or down. Carmaker bailout gone, markets fall. Searching for the right moment to buy in, not wanting to miss a huge rally, not believing that a sustainable market rise can occur any time soon, but acting like it might. After all, what do market traders do for a living? Sit and wait or trade? Up-markets seem to be trading on hope, and not much more.

We are not at or near bottom. We are probably months away. No one knows for sure when that “there’s no place to go but up” moment will arrive, and most feel that even when we get there, we will hang around bottom for a significantly long period of time before a slow rise in the markets returns. The unemployment numbers will have to stabilize; jobless benefits dipped for a brief moment and rose again almost instantly, but announcements of record unemployment insurance applications and large-scale layoffs in the last 30 days suggest that the jobless numbers are likely to rise significantly for the foreseeable future. The official unemployment rate has risen from 6.3% in October to 6.7% in November. Experts still see the 8%-9% level in the near term. I’ve already noted that when you count those part-timers wanting full time work and those who want to work but have given up looking, the government’s own numbers double those rates!

Housing prices need to stabilize as well – those who really should not have bought a home with subprime mortgages and cannot carry a real interest payment – need to be weeded out of the market, and those who can afford to keep making payments must be supported (with government aid if necessary) to stabilize housing prices. Home values still have a way to fall. I proposed solutions I earlier blogs (and I still stand by them), and I suspect that realistic platforms are likely priorities in the coming months.

Even as the current Administration seems to be distancing itself from the obvious and inevitable housing solutions recommended by its own FDIC appointment, Sheila Blair, there’s still a lot of pressure on Treasury to put an effective cap on mortgage rates on existing homes and to solve the housing problem without only helping homeowners who are in default. Even with the recovery – in that not-too-close period of resumption of growth – housing prices are unlikely to grow annually at much more than a percent or two, on average, over the general GDP.

We also have some hidden nasties outside of the private sector that need to be reconciled as well; CNNMoney.com (December 11) reported the following issues at the state and local level: “According to [a] report from the Center on Budget and Policy Priorities, new budget gaps have appeared in the budgets of 37 states, plus the District of Columbia. The organization estimates that current budget gaps total $31.2 billion, or 7.2 percent of these states' budgets.”

And the traders’ increasing “exhaustion” (from the panic mentality that clearly has governed the market since September 15) will eventually moderate the markets. Absent truly shocking news, the markets eventually will be less prone to violent overreactions, wild gyrations and unjustified fluctuations. As consumer “fundamentals” bottom out and solidify, as the impact of prudent government programs (so far, very few of those exist) is absorbed into the system, pragmatic analysis will become a more dominant indicator of market values. Consumer and market confidence will rise, and good leadership from Washington can go a long way to inspire that confidence.

And then we turn to the arenas of government rules and regulations – the necessary reexamination of every regulatory body, the rules, their effectiveness and those financial structures and instruments “that got away” but still managed to tank the system. One of the first to fall under this microscope is that esteemed body of credit-rating agencies (like Moody’s or Standard & Poor’s), third parties that set the debt risk parameters for major companies and major new transactional markets.

The Securities and Exchange Commission is taking a close look at the same agencies who gave “A” ratings to many subprime debt aggregation structures… who effectively labeled as gold the obviously absurd underlying financial assumptions. They are paying particular attention to the inherent conflict of interest where because it is the selling or issuing party, not the investor, who selects and then pays the rating agency. If you are selling a debt security, would you knowingly pick a rating agency with a reputation for fairness that might not give you the rating you need to sell your “merchandise”? A lot of winks out there, huh?

And finally, even as the government incurs massive deficits to “bail” us out of this malaise (essential if we don’t want to mirror Japan’s failed government inactivity during the 1990s that led to a ten-year recession), we need to rethink our daily lives. Our homes are not our savings accounts; they are dwellings. Borrowing for present consumption is no longer a viable practice and debt in general must be questioned at every level. Energy costs will eventually skyrocket again as part of any recovery, and we better have a plan in place to generate cleaner, cheaper energy as well as how to reduce our consumption of it. I’m heartened by the President-Elect’s appointment of a Nobel Prize-winning physicist with alternative energy expertise as our Energy Secretary-designate.

So bottom line, the markets can’t really rise or stabilize until those grassroots fundamentals stabilize. Waiting for that magic moment in the next few months when all will be right with the world and the stock market will begin a steady ascent is a colossal waste of time and energy.

If we believe in a future, we must invest in that future. I’m not talking about the stock market; that will adjust with everything else. I am talking about what I believe is a priority easily lost in the financial drain on our nation: retraining adults whose jobs have been displaced – continuing education is a lifetime mandate for every skilled worker in our nation – and providing our children with the best primary, secondary and post-high school education we can possibly afford. It is the primary investment that creates long term economic growth and a sustainable quality of life. You’re only as good as the people who create value for your society.

I’m Peter Dekom, and I approve this message.



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