Independence Day 2010, the 234th anniversary of what turned out to be a fabulously successful experiment in ordered liberty, finds us refreshed by a retreat to one of our country’s great rustic treasures. That remote expanse of mountains and valleys where Colorado abuts New Mexico is, at this time of year anyway, is a soothing alternative to both Texas heat and Market-based discomfiture. It also turned out to be an excellent time to be diverted from share price fluctuations by wily salmonids, steaming hot enchiladas and one magnificent vista after another.
As noted several weeks ago, the Market was good and ready for a correction when a sufficiently efficacious catalyst in the form of “contagion” (fearing fear itself) arrived. With the S&P having declined just over 17% over the past 2+ months, this correction would seem to be in overtime. “Contagion” fears have spent their fury, but something else seems to have doused whatever Bull Market potentiality is out there. There are a couple of ostensible reasons for this lingering deficiency of enthusiasm, but I strongly suspect that the most important piece of the wet blanket currently in place is that big issue hiding there in plain sight, too big to see. It could be the consequences of persistent deficit spending has finally sunk in for a plurality of investors, but this is an issue that has been at or very near to center stage for all but a very few of my increasingly massive pile of adult years. This issue seems intractable from where we sit today, but not necessarily any more so than it seemed in say, 1982 or 1992. We also have a number of articulate, tough minded governors who have fixed similar messes, albeit on a smaller scale, who just might step up and get the fix started in 2013. I also suspect that “contagion” did in fact take a bit of zip off of the recovery, as decision makers all over the globe tapped the brakes in a manner akin to what we unconsciously do when we are driving and something happens way down the road. (Speaking of highways, my nearly 2K miles of driving across TX & NM suggest that either the recovery is intact or there are an awful lot of empty trucks and trains on the move out there!) This could manifest itself in Q2 earnings reports that are not quite as boffo as the preceding 3-4 quarters were, but in the case of the companies that I follow, such an outcome was in the price and then some a month or so ago.
My sense is that either it is later than we think, as in that which we celebrate this weekend having lost its ability to mitigate the wretchedness that has denoted so much of history, to a degree that we find ourselves on a steep and slippery slope akin to Rome c. 300 A.D.., or we are very near the end of a somewhat protracted correction in yet another Bull Market. Not much one can about the one, especially if you already live in the country that has served as THE safe haven for past 100+ years. That would be the instance in which the bet against the seeming end of the world (the one I recall making in 1987, in January 1990, in March 2003 and again six years later) turns out to be the wrong one. Kind of tough to hedge that one, so I am sticking with the bet that we’re not quite there. Not yet anyway.
Before I dig into what I think has got everyone so bummed out, that is, the situation that will eventually abate and allow for a regression towards “normal”, it would be a good idea to revisit what I understand normal to be. If, indeed, the era of Pax Americana is solidly behind us, this “normal” will not apply, but such is probably not the case. The normal I am referring to is the Market’s tendency to experience seasons of upward or downward bias, which we refer to as Bull or Bear Markets. For the past several decades, there has been a strong tendency for there to be Bull Markets of more or less four (typically more) years interspersed with Bear Markets of more or less (typically less) two years. Right now we are sixteen months in what, unless we have evolved beyond Pax Americana Normality, should be a Bull Market with at least a couple of more years to go. What’s a little abnormal is the degree to which the Market (as measured by the S&P 500) has declined. I went through all the data I could get screening for moves of 5% or more in either direction. There are plenty of > -10% declines during Bear phases, but surprisingly few during Bull phases. Indeed, the only double digit pullback during the past two Bull Markets (1991-2000 and 2003-07) I could detect was the one associated with LT Capital/Russia in H2 98, a -20%-ish speed bump that interrupted a very well developed Bull Market of a Lifetime (NAZ 5000!) Pretty much every other pullback was in the range of 5-9%. That puts the action of the past month, a 17% pullback so early in the recovery from the Market equivalent of a sixty year flood, at odds with what would seem to be normal.
So what’s got everyone so bear’d up? I suspect’s that its what’s going on, or perhaps more to the point, not going on down in the Gulf. Investors who look to the US as something of a beacon of stability and safe haven of last resort are watching the government’s response to the oil spill and finding it very queasy making. Is this the best the putative leader of the free world can do? Who imagined that we were so encrusted with bureaucratic fiefdoms and other equally debilitating factions? Well, we got a bit of hint with that other disaster a few years back. The chattering class comparisons with Katrina had their day and died down quite some time ago, but as we move toward day 80 (or whatever), a fresh “compare & contrast” would seem to be in order. There are certain strong similarities, besides them being visited on the ancestral homeland of my good Cajun friends. Both were instances where Nature furiously lashed back at the pretense that Man could control her, whether by levees or by that vastly more exquisite engineering feat that is deep sea drilling. In both instances, vast sums of money get thrown hither and yon to speed it along, but Nature will rather quickly, within her schema anyway, repair the apparent damage. (While the delays in deploying the best available skimming technologies are inexcusable, and the 15 ppm rule be damned!, it is also a fact of nature that the Gulf is very big and the sun is very hot. At the surface anyway, the molecular soup that is crude oil rather quickly falls apart, its lighter fractions meant to end up in products such as gasoline evaporating into the atmosphere, the heavier ones meant for asphalt dropping into the fathomless deep.) Finally, both episodes have vividly illustrated that the competence of government is even more constrained and ultimately delusional than any purported technological mastery of nature.
It is with the passage of time, though, that the import of these two episodes diverges. That and the bias at the root of each Administration’s error. In the case of Katrina, the federal government was a bit desultory, perhaps too deferential to what turned out to be spectacularly inept local entities. However, it was only a matter of days before they corrected this (admittedly, a seeming eternity for those caught up in it, but it was a few days nonetheless). With the spill, a seemingly similar, lackadaisical response at first, but as days turned into weeks and now months, something sinister seems to have emerged. Not only do we seem to have an Administration that would “never let a crisis go to waste” but its actions (and inactions) seem cynically calculated to extend rather than end the crisis. It could well be that this is just what you get when you put someone with zero executive experience into a chief executive position and then something unscripted happens. But maybe they think they are smarter than that. The clean-up has thus far been executed almost as inefficiently as is humanly possible, as if it had been deemed the substitute for all those “green” jobs that were supposed to happen before Planet Gore imploded (better to have all those marginally employable clients of the state out on the beach than poking into people’s homes to check the insulation, though! But am I the only one who notices that when the news clips go to the clean up sites that there is very little actual work going on, that the ratio of those actually working to those just standing around is probably worse than what we see on road repair sites?) We also get to hear, ad nauseum, from the likes of Mr. Joe Biden, how “the government is going to make things right.”, 24/7 political theater. All this leaves me, and many others I am sure, a little scared of the prospect that in the event of some truly dire threat (the spill is tragic, but given the compensation schemes in place, dire only to the creatures living in the water) we would be utterly incapable of any sort of effective response. The responses to Katrina were inept in ways we kind of expect of government, like the first few battles in 1861 or 1941. The response thus far to the spill betrays hubris an order of magnitude greater. It is emblematic of, at best, shameless and cynical political opportunism, and, at worst, of a civilization poised for collapse. As such, it is disconcerting enough to sate the risk appetite of investors at the margin and send them scurrying into the safest possible havens. And that is what happened in June 2010.
However troubling all this is, I still see a silver lining. The people are not fooled by this cynical chicanery. Remembering that the best thing about the putatively erudite Jimmy Carter was that his ineptitude and aloofness made President Reagan possible, I think that the handling of the spill is one more reason that “inmates running the asylum” will be greatly curtailed in about 120 days, will end in two years and, God willing, will not recur for another thirty or so years. I have lived long enough to experience the truth in the assertion that things are almost never as bad as they seem nor as good as they seem. Right this moment, it feels bad. It might even be bad. But unless 234 makes us very long in the tooth, “normal” is a damn sight better than it all feels right now, and the Market will reflect that in the months just ahead.
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