Good Evening: Tuesday turned out to be a relatively tranquil day for our capital markets, especially in light of yesterday’s drubbing in so many asset classes. Stocks, bonds, currencies, and commodities all finished within walking distance of unchanged by day’s end, and while a respite from the recent declines is certainly welcome, it’s not exactly bullish that stocks, credit, and commodities lack energy after fairly sizable declines. What will it take to break this hapless cycle of self-reinforcing negativity? Perhaps a view from Down Under will be of help.
While they didn’t exactly shrug in reaction to yesterday’s downdraft in Wall Street, global equity markets overnight weren’t down as much as U.S. markets had been on Monday. Our stock index futures were on the sunny side of yesterday’s closing levels heading into Tuesday, with finger pointing about AIG one of the morning’s big themes. Both former AIG Chairman, Hank Greenberg, and current Fed Chairman, Ben Bernanke, took turns disparaging the insurance giant. The usual claims of greed and regulatory failure were bandied about, but I’m convinced that AIG would be in a lot less trouble had Credit Default Swaps now hanging like a noose around their neck been required to be listed on exchanges subject to the same oversight and daily margin requirements that are a common feature of our futures and options markets. Former CFTC Commissioner, Brooksley Born, proposed this very concept in 1998 (prior to the collapse of Long Term Capital Management), but her idea was shot down by Alan Greenspan, with assistance from Robert Rubin and Lawrence Summers. She was right; thanks again, Maestro.
Stocks opened 1% or more to the upside, but this early pop could not be sustained in the face of today’s economic statistics. Pending home sales figures were down 7.7%, or twice a much as the drop expected by the consensus. Pending sales lead actual sales, so there is still no housing bottom in sight (for BAC-MER’s take, see below). Auto sales were just as putrid, falling to an annual rate of 6.4 million units (see below). By way of comparison, auto sales were running at 11.6 million at this time last year, and they peaked at even higher levels earlier in the cycle. Since housing and autos still tend to have the largest multiplier effects in our economy, stocks backed off as this news trickled in during the day.
After the morning rally faded, the S&P fell below 700 for the first time in 13 years and is almost back to the level when Alan Greenspan gave his famous “irrational exuberance” speech in late ’96. Equities bounced back above 700 during the afternoon, but a late sell off left the averages down between 0.15% (NASDAQ) and 1.85% (Russell 2000). Treasurys couldn’t be bothered during much of today’s trading and yields rose a modest 1 to 3 bps. The dollar was likewise less than volatile in posting a 0.15% gain, while the commodity complex managed a slightly better bounce after yesterday’s pounding. Oil was up more than 3%, and though precious metals were once again under pressure, the CRB index finished 1.6% to the good.
The link you see below comes courtesy of the online version of the Australian, though its author, Niall Ferguson, teaches at Harvard and is associated with the Hoover Institute. Mr. Ferguson was one of the favored few thousand who rubbed elbows with the powers that be at the recent economic forum in Davos, Switzerland. His observations from that glitzy summit are as interesting as they are eloquent. He reduces our current economic travails to a very simple observation (and I’m paraphrasing him here): “The developed world has taken on too much debt — can the Keynesian prescription of taking on even more debt be the solution?” He cleverly calls our current mess and the piecemeal fixes offered to date “the great repression”.
Not content to just complain, he also offers an equally simple strategy to set us on the right path. Mr. Ferguson thinks the U.S. needs to take the lead by taking its banks in hand, restructuring the worst of them and their obligations until the U.S. and global financial system can once again function. He also feels a dose of inflation will turn out to be one of the more politically expedient ways of defeasing all the accumulated obligations. And though I must admit his solutions come up a bit short on the devilish details necessary to implement his ideas, I do his well written arguments little justice here. I advise everyone to read the article for themselves, and I will close with the final paragraph of “The great repression”:
“Americans, Churchill once remarked, will always do the right thing – after they have exhausted all the other alternatives. But if we are still waiting for Keynes to save us when Davos comes around next year, it may well be too late. Only a Great Restructuring can end the Great Repression. It needs to happen soon.”
— Jack McHugh