Friday, September 17, 2010

Market Update

First of all, let me say that I concur with Fran's prognosis.

Bill Bonner articulates the thought well -- the economy appears to be 'rolling over.'  The highs of April are receding into the past, and the mini-rallies since have yet to really challenge those highs in a convincing way.  Commodity prices are still high, but stagnating.  I don't think anyone needs a reminder about unemployment.

Things appear to be shaking out more or less as predicted way back when, albeit in painful slow-motion.  The stimulus has propped up prices -- temporarily.  The money supply explosion has kept the most of the banks out of the morgue -- temporarily.  Even the mainstream economists are beginning to conclude that these attempts at priming the pump just didn't 'take' the way the experts had thought that they would.

Not that such attempts ever have.  But by that clever definition that 'insanity is doing the same thing over and over again and expecting a different outcome,' a rational person would have concluded that the economics profession went insane a long time ago.

Who Will Washington Ruin Next?

Now that the stimulus is wearing out and the artificial profits are drying up, markets are looking green around the gills again.  It looks as if any moment now we may again be testing the limits of the financial system's wherewithal to keep the fraud going in any kind of convincing manner.  Sadly, here we are two years later, two years gone and trillions more spent, and we are headed back to the brink.  Washington and Wall Street could have simply let the crisis play itself out, let the chips fall where they may and gotten the books cleared two years ago, and we would be two years into recovery today.

Instead, it has been extend and pretend, and millions out there are stuck jobless or their lives on hold.  Entrepreneurs and businesses can't make decisions because they don't know where they stand.  Should they cash in on Washington's artificial markets, and risk getting caught with their pants down when Washington throws in the towel?  Or should they wait Washington out, and watch idly as the subsidy-mongers eat their lunches while they slowly go bankrupt?

Nobody knows.  Prices can't correct, and nobody knows what to do or what is going to happen next.  The saga of the Great 21st Century Mexican Standoff continues.  Muddle-muddle, toil and trouble.

For the sake of what?  The entire economy is in deep freeze so that the losses of yesterday's bad investments won't be realized.  Reality is suspended for the sake of vain fantasy.  Intelligent people recognize that the visible economy of 2007 was nothing but a mirage and not something based in reality.  Trying to preserve or restore it by force is a fool's errand and only prolongs the misery.  I'd rather put this mess behind me and get on with my life, but that doesn't seem to be in the game plan.

Upside Risk?

Some speculate that the coming elections will fix the crisis by putting an end to the stream of Democratic idiocy coming out of Washington.  I respectfully disagree.

To effectively grapple with a problem, one must have some grasp of what the problem is in the first place.  Obama and his left-leaning colleagues are certainly not helping the situation with their panoply of idiotic initiatives, and in some cases seem to be doing their best to make it worse.  But the uncomfortable truth is that there is only one way out of the crisis, and that is to suck it up and wade right through it.  Assets must be repriced in order for markets to clear.  The logjam will not be unstuck while relative pricing is forced to approximate the year 2007 by government 'initiatives.'  Until relative pricing corrects itself, business is going to be on hold, because there is simply no way to make a profit.

The Republicans had their chance under Bush II to allow the price correction to commence, and chose of their own accord to demure in favor of statist 'do-somethingism.'  Tea-partiers may vote as they like, but I suspect it will be to little effect.  Politicians have at least three principle modes of operation:  campaign mode, minority office-holder mode, and majority office-holder mode.   Perhaps a fleeting lame-duck mode might also be added.  In any event, the first two usually have little to do with the third, where the laws get passed.  After two years of do-nothing gridlock, we are likely to see moderation of the passions of today.  I suspect a little dose of economic reality might also have a similar effect.

And we are already seeing the Republican Establishment's venom towards the new upstarts.  It is clear to me who owns the soul of the party.

Beyond the Point of No Return

Besides, things are too far gone to turn the train around, regardless of any supposed change of heart.  The fact is that we are not headed for the edge of a cliff.  We are already over the edge, like Wiley Coyote suspended in midair, blinking a couple of times in surprise before he plunges down to the canyon floor below.  Maybe our fall won't be quite so abrupt.  I suspect there will be a few rocky outcroppings to slow our descent.  But that picture captures the general idea – the die is already cast, and there is no turning back. 

There may be a temporary uptick due to short-term euphoria if and when the Republicans get control of Congress, but the problems will still be with us.  They aren't going away.  They must be faced, and electing the 'right people' (who probably aren't anyway), is not the same thing as facing them.

Trust not politicians offering solutions.  There are none.  The sooner we pass through the valley, the sooner we may begin the long, slow ascent.

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