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 July 2010 What Won't Heal the Economy Vilifying Wall Street Isn't the Answer
Unfortunately, they were prioritized in the same order. Significantly more effort was focused on affixing blame than on rectifying the actual problems. Perhaps that's human nature, but regardless, it won't help remedy the situation. With so much uncertainty it's no wonder stocks stalled in the second quarter. Until now, investors had been anxious to get back into stocks on the hope that they were buying low before the coming recovery. That was a nice theory, but the only thing missing was actual growth. Everyone expected that to come in the latter half of 2010, but the closer it got, the less likely it appeared. But without a doubt, the most nagging thing for long-term oriented investors was that fear of what would become of equities and the entire domestic financial market. No one talked about it openly, but you know it was in the back of every investor's mind. How can real growth return to pull the U.S. out of the current doldrums if so much effort is going into demonizing Wall Street?
A Decade of Blame
That wasn't just a turning point for share prices, it led to a major change in perception of Wall Street. The corruption which led to the collapse of WorldCom and Enron (and ultimately Arthur Anderson) became associated with Wall Street greed. The ensuing bear market was portrayed as the fallout of heartless CEOs pillaging the common man, whether he be a employee of a fallen company or an investor in the same. Investors, unwilling to admit they bought the result of smoke and mirrors in the internet runup, were pleased to blame their losses on white collar predators. The press helped make fraud synonymous with Wall Street. From corruption at wholesome Parmalat to Bernie Madoff's audacious pyramid scheme, investing's image changed from gambling to gambling with a crooked dealer. When the credit crisis erupted in 2008, it was easy to explain it as yet another result of greedy investment bankers and corrupt traders. If you were a Martian listening to the nightly news from Earth, you'd have thought an army of deceitful lenders were out convincing noble but non-creditworthy consumers to invest their life's savings in the latest real estate scheme, knowing full well their mark had no ability to repay the new astronomical debt. Yes, it was self-serving bankers who drove the U.S. economy to the brink. Just when things were starting to look up, who else but giant pharmaceutical companies and insurers were to blame for rocketing healthcares costs? Even President Obama and his supporters realized the easiest way to gain support for a wildly unpopular healthcare bill was to vilify the healthcare industry. Facts played no role when the entire argument could be framed in terms of big evil companies against poor defenseless consumers. Indeed, today's remarkably poor state of politics has relied on portraying Wall Street as the source of all evil. Populist rhetoric against the "big boys" of business can energize even the most worthless politician's standing. That's why President Obama is more than willing to spend countless hours castigating BP instead of coordinating a search for a real solution to the oil leak in the Gulf of Mexico. Tough sounding sound bites can win a lot more votes than backroom negotiations or foreign assistance in actually cleaning up the mess. Ironically, a great deal of the populist diatribes against Wall Street is emanating from precisely the same politicians whose poor judgment led to the crisis in the first place. The same Congressmen who pushed Fannie Mae and Freddie Mac to lend to poor credit risks are loudest protestors against the U.S. financial markets. They're the same ones who also blame medical providers for rising costs attributable to defensive medicine and frivolous lawsuits while completely neglecting tort reform in their sweeping healthcare reform. Believe it or not, this isn't a political screed, it's simply a statement of fact. In today's convoluted political atmosphere, there are a lot of points to be made by blaming the denizens of Wall Street, yet there are plenty of negative consequences as well. The weakness of the current recovery is just the tip of the iceberg.
Deeper Damage As the second quarter of 2010 drew to a close, it was painfully obvious robust growth was not just around the corner. In fact, the closer the July came, the weaker the economy appeared. Rather than bottoming and moving up, new home sales fell by a record amount in May (32.7%). Year-over-year sales were off 18.3% and homes that did sell, did so at a median price almost ten percent lower than the prior year.
A great deal of the decline was actually attributable to the government's efforts to jump start home sales. The first time home buyer's tax credit expired at the end of April and along with it, demand expired, too. This is the same phenomena auto sales suffered when the "cash for clunkers" program came to a close. In essence, these well-meaning programs don't really accomplish their end: They don't stimulate new demand. Instead, they simply moved demand from coming months forward, giving potential buyers incentive to act now, rather than later. No new buyers are really created, the existing pool is simply moved up leaving a void in the following months.
Retail sales also posted new found weakness at the end of the quarter. May figures were down 1.2%, the first decline since September 2009. Early reports on June chain store sales reflected a 0.4% drop when analysts expected a mild recovery. Unemployment remains stubbornly high and is most likely under-reported. Many discouraged workers have given up looking for work so are no longer counted in the official numbers. Some economists estimate that the actual unemployment rate is running somewhere around 12%, but then that's more of a guess than the official figures. The point is, unemployment is still running well above the 8% maximum promised with the passage of Congress' 2009 $687 billion stimulus package. Ironically, one of the reasons employers are reluctant to hire is the unintended consequence of the Obama administration's crowning accomplishment -- nationalized healthcare. With its proposed penalties and mandates, employers are uncertain of the costs per employee. Without the ability to effective gauge this, the most prudent course is to stay the course and delay any new hiring until the details are fleshed out. As the quarter drew to a close, Congress was on the verge of passing yet another misguided bit of legislation designed to right the financial wrongs of the past. The bill would create a new government agency to oversee and regulate the banking industry. Presumably it would ensure that firms were well capitalized and eliminate the need for any future taxpayer-funded bailouts. Unfortunately, it would burden small community banks more than large money center institutions, even though the latter are the only ones that would ever need or receive such massive assistance. Even worse, Congress continues to refuse to address the biggest drains on the economy, Fannie Mae and Freddie Mac. Already $145 billion -- that's right, one quarter of the value of the gargantuan "stimulus" package -- has been wasted propping up these failed agencies. These were the darlings of the champions of the new regulatory bill, so the taxpayers will continue to foot the bill. In late June, Congressional Democrats were thwarted in their efforts to pass yet another stimulus bill. Although most headlines read, "Republicans Block Extension of Unemployment Benefits," the bill's greatest focus was more unfunded stimulus spending. As yet another irony, the very fact that the authors believed such a bill was necessary was a tacit admission the 2009's humongous stimulus was a failure.
The Real Solution As well-intentioned as it may be, the government cannot buy a recovery, only the private sector can truly create jobs. On the other hand, poorly planned and executed government intervention -- particularly onerous taxes on "The Rich", the very few who can actually create jobs -- can damage the business environment and paralyze the recovery. Freshman economics teaches that economies grow by meeting demand for goods and services. This can only come from the private sector. Employment was high in the Cold War era Soviet Union, yet its economy was perpetually sluggish. Government jobs don't produce goods and services to meet demand, they just create more government for the taxpayers to fund. This is why the 2009 stimulus failed, the only jobs it created was government jobs. Need proof? Just consider the May employment report. Although it was initially hailed for creating over 400,000 new jobs, the euphoria quickly diminished when further analysis revealed virtually all were temporary jobs for the U.S. census. While not always to this extent, this year's employment reports have all been skewed towards government jobs, yet real economic growth remains elusive. The government needs to work with rather than against private businesses in order to be part of the solution. Demonizing specific companies may win a few votes in November, but it won't create new jobs or move the economy forward. This has got to be a concern for any serious investor. Companies that are strong leaders one day may be in the demagogues' crosshairs the next. The more pressure that's applied to individual companies and Wall Street in general, the weaker they become. As long as increased regulation and/or new taxes are on the table, private businesses will be loath to increase their workforce. A real economic recovery must be fueled by new private sector jobs and actual growth. Only Wall Street and the firms that trade there can do this, but as long as they're the scapegoat for Washington's foibles, investors are right to be circumspect. In the long-term, there's plenty of room for growth, but the short-term is a lot riskier. This will only change for the better when today's political leaders relearn they must work with Wall Street and the private sector, rather than simply blaming them for the current difficulties. Search this site! Just enter you key word or words:
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HE FIRST HALF OF 2010 never lacked for market moving news. Between the European debt crisis, the stagnant domestic housing market, and falling inflation, there was plenty to trade on. These were all critical economic and financial data points, each driven by its own unique catalyst. Nevertheless, underlying all were two questions: Who was to blame and what could be done to fix it?
