Wednesday, May 17, 2006


Think of it as the Marshall Plan as administered by Alfred E. Neuman

OUR FOUNDER (image from a classic Nation cover, reproduced without credit and presumably without compensation at the site of that defender of property rights,Neil Boortz under the very classy title "SHRILLARY'S LACK OF CLASS") I get frustrated when people make grand pronouncements based on minor movements of the financial markets. This goes just as much for the newsie who tells us that the Dow ended up three points because Americans haven't been getting raises as it does to this one-liner from the definitely-knows-better Atrios: Well, it was just recently that conservatives were crowing that the great and wonderful Bush boom was, 6 years later, leading the stock market to a "new record" as if that was an achievement to be proud of. Na. Ga. Ha. Pen. If he had linked to a 5 or ten year graph of the Dow, that would have been fine. That graph would have shown a basically flat market for Bush's tenure and would prove his point. Adjust for inflation and denominate it in a weighted basket of world currencies, and the Republican talking point is exposed as total manure. It has achieved a new record high-- but with a dollar worth something like --finger in wind-- 40% less in constant currency terms.That's very roughly 20% inflation and 20% currency shift; you want a better estimate, pay me for it Instead, Atrios linked to a five-day graph, showing a 500 point drop. It's a bit of demagogy. Markets go up. They go down. If you sell when they are up, you are happy. If you sell when they are down, you are sad. Now, Atrios knows that there's a bigger story here, but it's richer and more complex. There are two basic narratives. The first-- call it "US as Argentina"-- is that the US is burdened by debt and unable to export anything but printing money as fast as it can. Therefore, either: I. 1. The dollar falls, immediately raising import prices on clothes and the like, and eventually sending oil prices up. As costs skyrocket, consumer-led demand falters. I. 2. Interest rates rise, reducing the money supply and stabilizing the dollar, but sending growth into the tank. I. 3. Taxes rise, reducing the money supply and stabilizing the dollar. Whoever gets taxed will spend less, so if it's the poor and middle class who get taxed, there will be less consumer-led demand, while if it's the wealthy who get taxed, all kinds of investment, both speculative and genuine, will decline. Growth will decline, but that could be good. I. 4. Inflation rises, soaking up the excess dollars and making everyone (except owners of hard assets and foreign stocks) poorer. Realistically, one would expect to see a blend of all four, rather than a single response. But there's another narrative. Call it the "Wile E. Coyote makes it across the canyon" narrative. In this narrative, the US may be defying conventional economic wisdom, but at a time when productivity growth is so high as to make convetional wisdom irrelevant irrelevant. By pumping tens of billions into the economies of China and India, we are giving them the kickstart to radically increase the wealth of the world. Wages worldwide rise, making American labor costs globally competive. Happy days are near again! Think of it as a Marshall Plan as administered by Alfred E. Neuman. The thing is, no one knows for sure which narrative is correct. Now, there's no doubt where I stand. I predict that the economy heads south. Wile E. Coyote heads for his rendevous with dust. The dollar falls maybe 20%, inflation heads toward 10%, the bond bears demand the Fed kill growth to protect their investments, and we end up in a Reagan-style recession, our remaining assets getting hawked to those buyers who are prepared for that moment. It's not so much the financial side, the debt and the war-- all pretty grim indicators-- that convinces me of this end. It's the loss of national purpose. The corruption. The likelihood that there will be a period of quasi-anarchy as we resolve the constitutional crisis Bush has created. The aimless drift of the nation: "Where there is no vision, the people perish." But at this moment, the market signals are unclear. Here are today's from Business Week, where the emphasis seems to be on theory I.4: Christopher Wang, Business Week: Wall Street skidded lower Wednesday after an upswing in consumer prices intensified investors' fears that the Federal Reserve will extend its nearly two-year string of interest rate increases. The Dow Jones industrial average suffered its biggest one-day loss in three years, and the Nasdaq composite index turned negative for 2006. Sam Stovall of S&P, Business Week: If you asked investors... what the S&P 500 and its constituents would do after the Fed had raised interest rates.... most would have expected the economy to slow, corporate earnings to slump, and share prices to tumble. And they would have been wrong. ... So what's next? ... [Oil prices will stabilize. ] S&P's Chief Economist, David Wyss, expects the economy to slow fairly abruptly in the second half of this year ... Core consumer price inflation [will] reach 2.5% by yearend. Overall, he predicts a rise of 11% in equities. Alec Young of S&P in Business Week: Despite their strong recent performance, Standard & Poor's equity strategists continue to favor stocks in emerging markets. After rising 31% in 2005 in U.S. dollar terms, the MSCI Emerging Markets Index is up 21% year to date, making it the best-performing major equity region in the world in 2006.... these countries' stronger fiscal condition is allowing for the early retirement of external debt and improved sovereign debt ratings, in our view. Hence, we believe, rampant inflation and boom and bust economic cycles, long the Achilles' heel of developing nations, are less prevalent in the world's key emerging nations than in past economic cycles. (This article has the fascinating tidbit that S&P undervalues stocks in countries with left-wing governments by 30%-- another reason to Buy Blue). Michael Englund and Rick MacDonald of Action Economics, , Business Week Financial markets received some unwelcome news on inflation on May 17 ... In midday trading on May 17, each of the major U.S. stock indexes had dropped more than 1%, while the yield on the benchmark 10-year Treasury note jumped from 5.12% to 5.18%. The dollar moved marginally higher in the immediate aftermath of the report... The relative lack of reaction could be a good signal of how bearish overall sentiment on the dollar remains. ...As expected, energy prices were a major culprit in the overall price advance But amazingly (from Smartmoney) Gold, which had soared as much as 4% overnight during a brief revival of the commodity craze, fell back below $700 an ounce. Crude closed below $69 a barrel as high fuel prices appeared to curb demand based on the latest survey of inventories. Asian markets revived after a slump, led by Bombay, Hong Kong and Jakarta. But Europe followed Wall Street's example downhill. Why would gold and oil fall on news of American inflation? Was the news less bad than predicted? Or could there be a different dynamic at work. I believe that printing money -> inflation, higher oil prices -> slower growth -> lower stock prices, which is why stock markets under Democrats routinely outperform those under Republicans. But even Alfred E. Neuman could have his day.
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