Saturday, November 22, 2008

Geithner announcement a ray of sunshine

In the past two weeks, the Bush Administration announced it would not seek the second $350 billion of the $700 billion “bailout” package approved by Congress. Also, Treasury Secretary Hank Paulson said there would be no new initiatives to deal with the credit crisis. So much for that promise to do “whatever necessary” to stem the crisis.

Sensing increased uncertainty amid this lack of leadership, the stock markets began falling further, setting new lows. Simply, there was no good news to give hope.

Suddenly on Friday, it was announced that Tim Geithner would be the new Treasury Secretary and the market responded with a nearly 500 jump in the Dow. As head of the New York Fed, he is intimately familiar with the ways of Wall Street, and as the former Under Secretary of Treasury for International Affairs, he understands the globalized nature of this recession. It was an excellent choice! It was also a little ray of sunshine that the markets desperately need.

Sunday, November 16, 2008

G-20 meeting filled with intrigue

If the journey of a thousand miles begins with a single step, this weekend was probably a good first one. Albeit reluctantly, the U.S. convened a special meeting of the 20 most economically important nations in D.C. this weekend, which was described as the “Platitude Summit.” The nine-page closing press release contained a pledge of closer cooperation, to meet again, and . . . “never again.” However, the important meetings were in the hallways, where creditor nations must have posed interesting hypothetical deals to Obama’s two representatives who are attending. There will be no press release of those discussions, but it is no coincidence that Obama sent a former Secretary of State instead of a former Treasury Secretary. (I hope it was a good omen that he sent both a Republican and a Democrat as his direct representatives, but we’ll see.)

Also, the concept of a “College of Supervisors,” consisting of the G-20 finance ministers, is interesting, but it will need broad investigative powers, if not regulatory powers. The U.S. opposes giving it regulatory power, but Europe is strongly in favor of that. One good thing to come out of this meeting was a real push for uniform accounting standards, which would be a giant step toward transparency.

Thursday, November 13, 2008

Was today the bottom?

Long time veterans of Wall Street believe it is not safe to say the bottom has been reached until the market touches closing price on the worst day a second time and bounces back up. Today, the market did that and ended with a huge 552 bull run. Does that mean the bottom is here and that it is finally safe to invest some of our cash . . . or open our 401(k) statements again?

From a technical standpoint, today didn’t exactly meet the test. While the S&P broke through its previous low, the Dow did not. And, the recovery was sloppy, more like a roller coaster than a rocket. Nonetheless, we are certainly closer to the bottom than the top. When the Dow is again 14,000, will it really matter if we bought in at 7,500 or 8,500?

Tuesday, November 11, 2008

Increase in money supply is terrifying

If you are a supply-side economist, you believe personal behavior and economic performance can be controlled by tax rates. If you are a Keynesian economist, you believe economic performance can be controlled by fiscal policy, i.e., taxes and spending levels. If you are a monetarist, you are terrified by this chart, because an historic, astronomical increase in money supply like this is certain to create terrible inflation.

For the first time, I really hope the monetarists are wrong, but . . .

Monday, November 10, 2008

ISM Report Is Telling

The S&P fell 3.9% last week. One of the primary reasons was the latest ISM Report by the Institute of Supply Management. A score of 50 indicates no growth. A score of 40 indicates a serious recession. This week, it was 38.9, which is the lowest since September 1982. Look at this graph.

The rapid fall is certainly stunning! But, notice the pattern of quick reversals as well. As scary as things are, keep in mind this too will pass! I’ve written that the bottom of the economic cycle could be Q2 of next year but now suspect it will be Q3. We’ve been through this 11 times since World War II. This one is longer and deeper, but we’ll get through this one too!