Wall Street has been sifting through the
horrific reports out of the Gulf of Mexico. Their rose-colored glasses allowed
them to see positives amongst the human and economic destruction: The stimulus
of rebuilding, the Fed pausing, cheaper oil. BusinessWeek notes the Street has been
There were significant tribulations to be
overcome before Katrina hit, and the storm’s devastation only adds to
Consider these sources of economic pressure:
• Oil prices are up almost 300% from their post 9/11 lows, and have more
than doubled since January 2004. Thanks to the demand side of the occasion, the
economy has been struggling under the costs. To quote Joan McCullough, the
supply disruption adds a “double whammy to prices.”
• The Consumer is stretched fairly thin. Inflation
continues to snarl; the days
of easy cash
out refis are behind
us. The catalyst for the next round of consumer spending is becoming
increasingly hard to see. At the least, I can suggest what it will not be: a
significant increases in wages (See the recent Census
Bureau report) or a new
spurt in hiring. A recent
Manpower survey of execs taken before Katrina implied more of the same –
lackluster hiring, best described as “lumpy,” with
strong regional variance.
• The Federal Deficit, already booming thanks to the unencumbered
profligacy of single party rule*, now looks to soar above half
a trillion dollars for 2005; And the budget for 2006 is widely expected to
be even worse.
• The War in Iraq, and all the costs associated thereto, has not gone away.
Our March 2003 prediction
for a final tab of a trillion dollars is looking increasingly prescient.
Katrina may have blown War coverage off the front pages, but the financial
burdens of this endeavor still remains a heavy one.
(Speaking of which) Off Balance Sheet funding: Since we’re
discussing these, let me remind you that a significant chunk of Federal
spending is so far “Off Balance Sheet” that it would make the CFO of
Enron blush. Its not just the war in Iraq funded via special legislation;
The other major expense is FEMA. This “Emergency” spending on an ad
hoc basis makes the deficit appear smaller than it really is.
Perhaps it’s a coping mechanism, a form of gallows humor that encourages Investors to see positives in the face of awful destruction. Regardless, it needs to be taken in context – as it points out that markets are not perfectly efficient, and can be as fallible as its Traders.
* Save your emails; this isn’t a political statement, but rather is
an historical observation.
It doesn’t matter which party is in power, but when
it’s but a single, dominant party without a counter-balancing opposition, we end
up with excessive spending.
But don’t believe me, you can look it up
yourselves. Or, for a typical example, see this article: No-Bid
Contracts Win Katrina Work