The Equanimist

Riding the rally

Posted in Economics, Economy, Political Economy, Public Policy by equanimist on March 24, 2009

While others seem very suddenly and insanely positive (see, for example, Jim Cramer’s change of heart), I remain unconvinced.


Economic fundamentals are largely unchanged. Transparency is still a pipe dream. The “solution” to mark-to-market accounting may be a good broom (with which to sweep the mess under a rug). Credit can get as cheap as dirt, but, borrowers remain broke and unworthy.

Some of the brightest minds in the world see a very hard road ahead. According to the BBC, the IMF predicts that the world economy will contract in 2009 (for the first time in 60 years). According to the Associated Press, Sen. Arlen Specter recently remarked, “[The nation is on the] brink of a depression“. Chairman of the Federal Reserve, Ben Bernanke told the Council on Foreign Relations on 10 Mar 2009, “The world is suffering through the worst financial crisis since the 1930s…“. And, on 22 Mar 2009, Paul Krugman wrote of the Geithner Plan in a piece entitled, “Financial Policy Despair“:

If the reports are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle the Bush administration policy — specifically, the “cash for trash” plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson.

This is more than disappointing. In fact, it fills me with a sense of despair.

Worse, “China’s Premier Wen [Is] ‘Worried’ on Safety of Treasuries,” according to Bloomberg. And, Avinash Persaud, Chairman of Intelligence Capital and a member of the UN Commission of Experts on Financial Reform, recently revealed that among the commission’s recommendations is a “new global reserve currency” to replace the USD.

Moreover, companies, like AIG and Washington Mutual, and people, like Vikram Pandit and Ken Lewis, just don’t seem to get it. While the public fumes over bonuses paid to AIG’s financial products division, the New York Times reports that AIG is suing the US government (its largest shareholder after several bailouts), and, Reuters reports that Washington Mutual is suing the FDIC for US$13bln. In response to the ‘bonus tax’ (a hasty and possibly unconstitutional response by the House of Representatives to public outrage over the AIG bonuses) Ken Lewis, CEO of Bank of America, recently wrote a memo in which he attacked the proposed ‘bonus tax’ as ‘unfair’; it is! And, he should keep his damn mouth shut about it. But, finally, Vikram Pandit is hiding behind his contract, taking a US$10.8mln bonus for 2008 (a year in which Citigroup lost many billions of dollars; as you may have heard, he is also remodelling his office).

The market is rallying in the face of a lot of mediocre and downright bad news. And, the data isn’t much better, (despite that some have taken to talking about bad data as if it were good; see, for example, two very different takes on the Feb housing data
here and here).

Nothing goes straight down. The “crash” in 1929 paled in comparisson to subequent market deterioration (see charts here, for example). And, the same traders effected some of the greatest rallies.

As of now, there is little reason to believe the pundits who prognosticate (with impunity) a “‘major’ bull market”. There is little reason to believe them because we have not yet begun to address the single most important cause of the financial crisis.

Much is now being written about “global imbalances” (see, for example, the Council on Foreign Relation’s Special Report, “Global Imbalances Must Be Reduced to Prevent Another Economic Crisis, Warns New CFR Report,“). This tells an interesting and important part of the story from a height of about thirty-thousand feet. Back on earth, the fact remains, radical redistribution of wealth away from economic growth and social stability — i.e., the engine of growth (the middle class, esp. the US middle class) and the infrastructure that otherwise supports it — has not reversed, and, I haven’t read of any plan to reverse it. In fact, just the opposite.

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