Hullabaloo

Thursday, August 04, 2011

 
The Desert of the Surreal
by David Atkins ("thereisnospoon")

Conspiracy theorists like to believe that the world is governed by incredibly smart, masterfully competent manipulators who pull all the strings for their own benefit and watch the world dance to their tune. That can be a comforting thought in the sense that it absolves the believer of the necessity to take action. After all, fighting the grand conspiracy is pointless, so why try?

But as one watches economic events unfold, it's increasingly clear that the truth is nothing so convenient as all that. Rather, our lives are governed and dominated by a bunch of fools who aren't much smarter than anyone else you see walking down the street.

That is ultimately the biggest lesson of today's massive market drop, in which a number of factors converged to demonstrate the surreal dark comedy in which our policy makers, media moguls and financial wizards are the lead actors.

Why the big drop? Any number of factors are cited, from the weak position of the Japanese, Italian and Spanish economies, to political uncertainty in the U.S. and abroad, to continued sloth in the U.S. economy. But as multiple commentators were saying today all over the cable networks, it's hardly a coincidence that this major selloff took place immediately after the passage of the big bipartisan austerity bill that every reasonable analyst agrees will kill jobs. This after a nearly uninterrupted string of losses leading up to the austerity vote, which have cumulatively led the markets to lose most of the value they have built up in recent years.

Clearly, the economies of industrialized nations are doing poorly the world over, but especially in America. The key question, though, that has many analysts stumped is why that matters to the stock market. Commentators on CNBC and CNN today were remarking that the drops in value seemed to be irrational, because after all, the corporations that make up the market indices like the Dow and S&P500 are still posting record profits, mostly due to cost-cutting (i.e., outsourcing to China and India) and overseas sales (i.e., selling products to China and India).

What was most amazing about this sort of commentary was that the talking heads were essentially unmasking the whole surreal free-market charade by asking the question most of us have been asking for a long time about the disconnect between Wall St. and Main St.: why does the American consumer matter at all? Why should multinational corporations care about the unemployment rate in the United States or Germany?

Well, the answer is basically that in the truly global free market FlatWorld of Thomas Friedman's dreams, they wouldn't. But investors are afraid enough of the lingering effect of us spoiled Americans not having any money to buy stuff, that they fear it might impact corporate bottom lines:

Wall Street firms had little appetite for holding stocks and other riskier investments on their books, and their traders dumped stocks into the closing bell. The Dow lost more than 155 points in the last hour of trading.

Some traders said the plunge put the market more in sync with the state of the U.S. economy. "The market sold off 500 points, it's not a crash, it's a small correction," said Stephen Holden, a floor trader at the new York Stock Exchange. "It's overdue…I think there's more to go."

"In this environment, no one wants to catch a falling knife," said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management.

Basically, economic policies demanded by Wall St. from Democrats and Republicans alike over the last 30 years have hollowed out Main St. and the American middle-class (smart old-schoolers like John Bogle would argue that they hollowed out Wall St. as well, but Wall St. got bailed out by the middle class. So there's that.) Wall St. doesn't really care about that, but they do care suddenly if it looks like the American consumer won't have any money to spend after all. A fact which suddenly hits them like a ton of bricks the day after the same austerity measures Wall St. demanded were signed by President Obama, based on advice from their utterly incompetent and failed ratings agencies. So everyone is throwing away stock in companies that are actually doing just fabulously, mostly by laying off Americans and not bothering to even try to sell to them anymore.

Wall Street types can't live with American consumers, but can't live without us either. So they get fat at our expense, abuse us, and then wake up one day and suddenly realize we're not quite as hot as we used to be. But we do still pay half the rent, so they can't quite leave us yet, either. So we get schizophrenic jumps and declines in the market, as Wall St. variously ignores and then over-focuses on the American consumer. These people aren't really any smarter than your average beer guzzling philanderer.

So in the midst of this giant selloff, where did the masters of the universe decide to put their money? Why, treasuries, of course:

Treasury bond yields are plunging to levels seen in the 1950s on concern the two-year recovery in the world’s largest economy is stalling.

Yields on benchmark 10-year U.S. notes are about 4.3 percentage points below the average over the past 49 years and almost where they were when President Dwight D. Eisenhower began his administration in 1953. The yield, which dropped to 2.40 percent today in New York, reached a record low of 2.04 percent in December 2008 during the global financial crisis...

“It’s signaling a flight to safety,” said Ethan Harris, head of developed-markets economic research at Bank of America Merrill Lynch in New York, on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “Even with the Treasury market as a weakened safe-haven market, it still gets the safe haven money.”

The S&P 500 fell 4.8 percent, dropping more than 10 percent drop from its April 29 peak. The MSCI All-Country World Index slid 4.3 percent. Oil plunged 6.2 percent to $86.27 a barrel as all 24 commodities tracked by the S&P GSCI Index declined. Gold futures retreated from a record.

Yes, the same treasuries that were supposed to be in horrible trouble because the ratings agencies said America was too far in debt to keep the yield on our treasuries at healthy levels. The same treasuries concern that led to the austerity bill that led to the market drop that led everyone to run to the only safe place left: treasuries. Brilliant.

And tomorrow there's a jobs report coming out, which will no doubt be worse than expected and lead to even more nonsensical selloffs, considering the strong bottom lines of the American companies that have made such a killing precisely by keeping that unemployment rate at high levels.

If this is all the work of genius master manipulators, someone will have to explain the evil scheme. What it really looks like is a bunch of greedy fools who can't see past next quarter's profit statement and next April's tax return, and end up swerving all over the political and economic road like the world's most shortsighted driver. Meanwhile, all the passengers get sick in the back wondering what the next swerve is going to be.

The only real question is: when do we take their hands off the wheel?
thereisnospoon 8/04/2011 08:00:00 PM |