Saturday, June 26, 2010

Markets Sense The Plague Is Coming (Back)

Markets Sense The Plague Is Coming (Back)
Order For New Age Of Austerity Takes On The G-20, Attacks Growth

By Nick Godt, Marketwatch | 29 June 2010

NEW YORK (MarketWatch)— In the 1947 classic novel "The Plague" by Albert Camus, a deadly epidemic shuts off the town of Oran in Algeria from the outside world and leads to panic, a near collapse of institutions, order, common sense and humanity. Ultimately, two leading and opposing trends emerge on how to respond with the issue and to sway the course of action. On the one hand, religious and repressive judicial authorities say the plague was a long-coming, well-deserved punishment from God for the sins of the populace and the breakdown of values.

On the other side is the scientific and medical community, which tries to relieve human suffering while seeking and ultimately finding a cure. The human toll, however, has been devastating— in large part due to human folly in opposing relief efforts. In the same vein, as leaders of the Group of 20 nations meet in Toronto this weekend, we'll all be reminded why the outlook for jobs and global growth as well as for markets is getting darker by the minute.

Unlike two years ago, when global leaders were united in their will to stimulate economies and avoid the abyss of another Great Depression, this time around, members of the "order for a new age of austerity," it seems, will outnumber the proponents of stimulus, job creation and growth. The order has found new high priests in the leaders of Germany and the United Kingdom, who say that we must accept the painful penance of cost-cutting measures now to appease the gods of market forces. Debt markets must be dealt with 'at all costs', as must the 'guilt' of passing on debt to future generations.

The simple idea that the outlook for long-term deficits magically improves when employment and economies grow, which boosts government revenues via already existing taxes, is apparently lost on anyone whose desire for repentance overwhelms everything else. The real-world result: The growth outlook for Europe has been severely hit, not because of the debt crisis itself, but because of the austerity measures. It could be said that some of the 14% correction in U.S. stocks from late April through early June accounted for part of this. This week, the Federal Reserve did acknowledge that there will be a hit to U.S. growth.

At the same time, the impact of stimulus measures in America— measures that were implemented at levels much less than advocated by many prominent, nonprivate-sector economists— is quickly fading. Huge drops in home sales and a downward revision in first-quarter growth might serve as reminders that, in fact, not enough stimulus was put into the economy. China, which spent 10 times more relative to the size of its economy, is now busily slowing down its growth.

Yet U.S. members of "the order" point to the fading effect of measures that were too small to begin with as proof that the really reasonable thing to do is "inflict pain by cutting spending". Nowhere was this more evident than in the punitive move by Congress not to renew the spending bill to extend the period of unemployment benefits: About 2 million Americans will lose their benefits by the end of July, including 1.3 million by the end of this week.

As Sal Guatieri, senior economist at BMO Capital Markets, said in a note: "This is another body blow to consumer spending, which is already flagging". Legislators' punitive side, meanwhile, didn't seem to impress Wall Street on Friday following what has been called the biggest overhaul of the financial system since the Great Depression. Banks and financial stocks rallied, with Goldman Sachs Group Inc. (GS) shares up 3.5%, J.P. Morgan Chase & Co. (JPM) up 3.7%, Bank of America Corp. (BAC) up 2.7% and Morgan Stanley (MS) up 3%.

But the "order" likely will say that private-sector firms are about to "unleash" a big wad of cash that will "make up for" the lack of consumer and government spending, and spark massive hiring in the face of a darkening global economic outlook. For some reason, however, firms flush with cash after the bursting of the tech bubble didn't really begin spending or hiring until after the housing bubble lifted the economy out of recession (as most reasonable businesses usually do). The "order's" faith in 'market forces' might be strong, but the market itself didn't seem to be holding its breath about growth this past week, which saw stocks slump for the first week in three due to worries about the economy.



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