Market Commentary

Several days ago I wrote what some viewed as politically charged remarks.
October 13, 2009

Several days ago I wrote what some viewed as politically charged remarks.  In my belief society is questioning and examining all past, current and future actions.  A psychologist friend of mine stated this is typical crisis behavior, an examination that will result in some change.  The extent and durability of this change however is dependent upon the depth and length of the crisis.

In my view the examination between the intertwined worlds of politics and economics should be given special attention.  Wall Street has been forever altered with some believing Washington bureaucrats can do a better job at managing the economy than the private sector.

While I believe regulations are needed in the derivatives and credit default markets, I think some of the other populist programs need to be scaled back.  At some point there is a tipping point where uncontrolled deficit spending will create a hyper inflationary environment.  I must emphasize we are not near that point but only stating that at some juncture “X” crosses “Y,”  the inflection point only recognized by history.

The Federal Reserve has been able to get away with the large monetization program of the last 18-24 months because of the massive deflationary forces let loose in the world by the credit crisis which forced huge deleveraging. 

It is apparent a lot of the money that the Fed has printed has gone right back onto the Fed’s balance sheet as bank reserves--$900 billion and counting--and these funds are not re entering the financial system in the usual manner associated with fractional reserve lending.  In my view the reason for this lack of lending are fears surrounding commercial real estate amplified by the most aggressive regulatory environment in recent memory.

However Federal Reserve policy is completely different than fiscal/domestic policy.  These are actions not laws that facilitate the transfer of wealth.

What happens to interest rates if the populist agenda is past?  How will the country pay for these programs?  Most economists believe if the most aggressive proposals become law the national burden raises to such a level potentially producing yet even a greater crisis.

I ask however what are the odds bank lending will accelerate before any of these policies are passed creating a self sustaining recovery?  Wishful thinking? Three months ago most thought the initial public offering would not rebound until later 2010. 

GDP estimates for 2010 are wide, ranging from 1% to 3.6%.  Consensus is around 2.4% which incidentally is the strongest growth since 2007’s 2.5% growth rate.  Incidentally the economy grew by 2.4% in 2006 and 2.7% in 2005.  2004 was the last year the economy grew at 3% following a 3.8% growth rate in 2003.

For those attempting to correlate job creation to GDP, the economy only added 87,000 jobs in 2003, the last time GDP was considerably over 3%.

Stocks posted a nominal advance yesterday on quiet holiday induced trading.  What will occur today?  This week’s action will be heavily influenced by earning reports and economic statistics.

Last night the foreign markets were mixed. London was up 0.14%, Paris down 0.11% and Frankfurt down 0.11%.  Japan was up 0.60% and Hang Sang up 0.79%.

The Dow should open nominally higher on profit expectations.  The 10-year is up 9/32 to yield 3.34%.