A Market Correction is upon us. As even a cursory look at a longer term chart will indicate, indices do not go for very long in a straight line. So here we are, carving out yet another “tooth” in the saw-like track that would be the Market over the past year-plus. As of a month ago, stocks had in about a year delivered what would be a decent return for five years. The path of least resistance no longer pointed upward, and so an interlude of back and fill has commenced.
Share prices are exemplifying what I take to be a larger drama: an ongoing divergence between the objective consideration of peril, and its subjective manifestation we understand in terms like “scary”. It seems that even though the world in many respects has become a less dangerous place (in terms of objective likelihood of being done in by disease, famine, war, crime or poverty as it was understood before it became a political construct) it has at the same time become a scarier place. We see it in the prescription counts for psychotropic drugs, one indicator among many of a raging epidemic of unhappiness despite what by the reckoning of our predecessors has been an unimaginable rise in standards of living. The world is in many respects safer than it has ever been, and yet we are more aware than ever of what remains of its not inconsiderable dangers. Even a couple of decades ago, we rarely if ever heard about mass murderers, floods or tornados more than a few miles from wherever we lived. Now all manner of tragedy, strife and absurdity comes at us like the electronic equivalent of a fire hose. It is as if such media has become a vast system for scouring out the fetid crevices of a fallen world and then pumping the most titillating of it into our living rooms and offices. Considering all that 6.7B humans and a what seems at times like an angry planet are capable of, how surprised should we be that our newfound awareness has made the world seem a lot scarier?
Naturally, this disconnect between objectively understood risks and subjective reactions that work themselves out in fear and greed plays out in financial markets. We needed a correction and so we are getting a correction. It is being helped along by fears centered on the goings-on in Europe (It sure isn’t the recovery of Corporate America that is freaking people out!). I have tended to diminish the import of the purported crises at the root of these fears, which after all involve a handful of tiny states that have been dysfunctional for longer than anyone can remember. It did not fail to occur to me, though, that the Crisis du Jour might be about something even larger than a non-issue like “Omigosh, Greece is even more dysfunctional than Italy! Who knew? (It least Italy, for all its flaws, has some centers of innovative excellence. Greece has nothing.)" It seems that maybe all those misgivings of a decade or so ago about launching a unified currency and then implementing the unified political structure (wherein such a currency might actually be sustainable) just might be coming home to roost. The uncertainty that seems to have triggered so much selling just might have a basis in the crack-up of yet another utopian scheme hitting the skids.
So, how awful would that be, really? If the more grown-up nations went there own way and left the perpetual adolescents to that form of tough love that is being left to their own devices, how would that hurt the global economy, once the dust has settled? Tourists would get nicked by the forex sharpies a little more often, a lot of signage would have to be changed, and the vending machine industry might get a wave of retrofit work (though card based currency has certainly taken the edge off that), but otherwise, what’s the problem? The Euro was a presumed triumph of the will to subsume a plethora of viscerally held identities into a utopian scheme of command and control. Calling to mind that which is said to pave the road to Hell, its impetus was no doubt rooted in ideals. But however much the initial impulse might have been the desire bring an end to the lethal xenophobias whose out-workings have defined the history of Europe, that is getting to be a long time ago. With the passage of the generation that can actually remember the wars, and the establishment of comfortable sinecures within the fortress that is Brussels, the impetus has most certainly evolved. In the 21st Century, we are supposed to believe that the ministrations of an elite nomenklatura can somehow render Europe into something more than a geographic designation. As Mr. George Will recently put it, “ The European Union has a flag no one salutes, an anthem no one sings, a president no one can name, a parliament (in Strasbourg) no one other than its members wants to have power (which must subtract from the powers of national legislatures), a capital (Brussels) of coagulated bureaucracy no one admires or controls, a currency that presupposes what neither does nor should nor soon will exist (a European central government), and rules of fiscal behavior that no member has been penalized for ignoring.”
It would seem that the Euro, indeed the whole European Union, is shaping up to be not much more than a conceit of continent’s political class. As I compare & contrast that sprawling and diverse patch of ground with the United States of America, it seems ludicrous that such a project should succeed. We are also vast and diverse, with differences that play out regionally (e.g., what barbeque is best?). We have our wounds from past struggles. However, these differences pale in comparison to what in many cases is a tribal rootedness going back a dozen centuries or more. We have a common language (is there anything that that makes neighbors into “others” more so than that they carry on using a language we do not understand?). We also have a Constitution which has proven to be exactly that, something durable enough to define us through some mighty tough tests. Europe is more like what twenty years ago we call Yugoslavia than anyone wants to admit (To the extent religion defined the quickly forgotten genocide that denoted that redrawing of borders, it was scarcely about doctrines or dogmas, but rather an element of cultural affect denoting “us” versus “them”.) I don’t see Europeans going at each others throats anytime soon, but I don’t see Greeks and Germans living in the same house, so to speak, either.
So perhaps there is substance behind the fear that has triggered so much selling, the beginning of a reordering of a decrepit yet significant economic bloc. Still, its seems quite farfetched to arrive at a genuinely dire outcome, except from the perspective of the more profligate states (Based on economic vitality, why should the standard of living in a place like Portugal or Greece be more in line with Germany or France than with Botswana or Bhutan?) Those places could be in for some rough sledding, and with that we should expect that cousin of unintended consequences that is unforeseen developments. The flight to safety ensues, but don’t be surprised if its duration is determined less by facts on the ground than by prices doing all they are going to do in that direction, and the “keepers of the cue cards” recognizing that the path of least resistance is ready to go the other way.
When President Roosevelt tried to encourage our ancestors by claiming that they had nothing to fear but fear itself, he wasn’t exactly telling the truth. There is objective danger in the world that warrants fear. He was cautioning against letting a natural emotion feed on itself until it rendered us incapable of responding to and overcoming the dangers at hand. In our hyperaware, hyper-connected world, and especially where those putative signals we call prices can be moved with a mouse click, we do well to remember that the crowd is full of players who are fearful that others might become even more fearful. At times like this moment, the most fearful are the ones who are at the margin setting prices. But we also have taken stock of a certain orderliness to the universe, and can rest assured that the extreme conditions thus rendered will in fairly short order be finding their way toward some opposite extremity.
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