As a financial markets trader, it’s hard for me lately not to
feel that we’re living in a Lewis Carroll-inspired stock market.
Stock prices often move counter-intuitively, and with large price
swings that have the distinct smell of “momentum traders” rather
than results of true fundamental changes in the U.S. or worldwide
economy.
Stock prices frequently go down on decent news and up on weak
economic news. It is not without reason, however: traders hope that
bad news will force the Federal Reserve into yet another feckless
but asset price-inflating round of “quantitative easing.” It is
indeed an Alice in Wonderland market (or perhaps an Orwellian one)
when good news is bad, and bad is good. A bad employment report
pushes stocks up, and a strong GDP report (not that we’ve had one
lately) brings out the trading Queen of Hearts screaming “Off with
their heads!”
Markets also move wildly on vague rumors or news about central
bank activity, as if the actions of a few self-styled economic
geniuses will save Europe’s economic bacon, as if the wolves who
smell the blood of decades of social welfare mentality and
accompanying deficits and debt can be defanged by waving a magic
wand and using words designed to impress and confuse the ordinary
citizen.
Thursday was such a day, with the Dow Jones Industrial Average
rising about 155 points on rumors that, as
Reuters put it, “major central banks are preparing coordinated
action if the results of Greek elections this weekend lead to
turmoil in financial markets.” The rally was despite weak
U.S. economic news in the morning, and a
downgrade of Spanish debt to near-junk levels by a major
ratings agency.
But is more central bank paper-pushing really something to get
excited about? Will you go out to dinner or take out a loan to buy
a new house because the European Central Bank is providing
liquidity in the face of Greek idiocy? (For the record, I predict
that the Greek election will result in a reasonably strong
governing coalition in favor of staying in the Euro and continuing
some degree of “austerity.”)
Britain led off the Thursday buying frenzy by announcing that it
would loan money to English banks at below-market rates if the
banks would lend to businesses. Just as with “QE” in the United
States, this move may serve as a temporary boost to asset prices…
but little more. But haven’t we seen this movie before?
The problem is not that banks don’t have capital to loan. It is
that loan demand is weak because entrepreneurs have little interest
in business startup or expansion. Who wants to take risk when the
short-term future is so likely to be a chaotic mess of politicians
playing politics while bankers wallow in the Keynesian muck, each
enabling the other to add more inflation risk to the economy and
more debt to our children and grandchildren?
A metaphor often used in finance to describe plans like what
Britain announced yesterday is “pushing
on a string,” something that was tried for more than two
decades in Japan without success, and for a recent few years in the
U.S. with equally limited results: great for investors in
government bonds, a waste of time and money for the rest of us.
Sadly, central bankers are no less susceptible to Hayek’s “fatal
conceit” than are senators or presidents, and perhaps more so.
After all Federal Reserve Board Chairman Ben Bernanke is a
“scholar,” a “historian” of the Great Depression; he
teaches courses to wide-eyed college students who fawn in the
presence of such greatness and wisdom, his actual job performance
and refusal to be guided by results rather than theoretical models
notwithstanding.
George Osborne, the British Chancellor of the Exchequer (roughly
analogous to our Treasury Secretary except that Osborne has not
been shown to be a tax cheat), understands that more government
borrowing poses real risk to his country and is a committed
budget-cutter and opponent of the burgeoning welfare state. But
once in power, it is difficult even for him to avoid attempting to
use aggressive monetary policy tools to avoid the unavoidable storm
that decades of fiscal malfeasance are raining down across Europe,
with the U.S. soon to follow.
Even Angela Merkel, the princess of European austerity, may be
pushed into a “growth pact” by pressure from other European nations
(particularly France’s new Socialist econo-moron president,
François “lower the
retirement age” Hollande) and from domestic politics. Merkel
seems likely to go along with a German financial transaction tax
that will do great harm to her nation’s financial markets and
German companies’ ability to raise capital, while driving millions
or billions of dollars of business into the waiting arms of the
City of London. But what is she going to do when her party keeps
losing regional elections and the head of the German Green Party
proclaims confidently that “the Europe of austerity is ending”?
When most Europeans talk about “growth” they usually mean — as
Barack Obama does — the growth of government. With their plans
drifting that way, with even conservative bankers desperately
pushing on a string, how can stock markets put on a big happy face?
After all, whether it is a “growth pact” or coordinated bank
action, the real message is not that there’s a new sheriff in town
but rather that their economies are dangerously fragile — as are
therefore their political careers.
But all is not lost, at least not here in the United States. And
even though stock buyers today might be wrong tomorrow or next week
(following Sunday’s elections in Greece and the results of
Spanish banks’ “stress tests”), they will probably be right
soon — even if for the wrong reasons. American institutions have
cut their exposure to European debt, so direct contagion from
turmoil across the pond will be limited. This is not to say that
there won’t be some panic here if a major European bank or
government fails, but rather that the panic will probably represent
a buying opportunity in U.S. stocks.
Furthermore, to the extent that people fear credit or liquidity
risk in dealing with European companies, they’ll look to American
suppliers; despite a modestly strengthened U.S. dollar, American
exports will not fall as much as one might expect during a time of
economic turmoil.
Our hope in the United States, the thing that can make
Thursday’s semi-rational stock buyers look smart in the long run,
is that we are not Europeans. Despite the wishes of President Obama
and the views of his friends in Manhattan and Hollywood, Americans
do not aspire to a massive, bloated social welfare state where
success is defined by what percentage of the citizenry is in a
public sector union.
A nation’s polity and its economy, especially those as large as
ours, are like battleships, not speedboats. They can be turned
around, but it takes some time. Still, our entrepreneurial class
may at least see that we’ve begun to turn our massive, misguided
ship of state when we get the Supreme Court’s decision on
Obamacare, likely on Monday, June 25, but perhaps this coming
Monday — the same day that markets will have the first chance to
react to Greek election results. Another aspect of a giant ship is
that once it is turning, it cannot be stopped on a dime (or on a
halibut); the turn away from Obamacare may presage American voters’
distancing themselves from the man for whom the law is
nicknamed.
If that happens, Thursday’s stock buyers may look like wise
investors indeed.
But until then, we remain in Alice in Wonderland’s stock
market.
