...on the Market
The sad fact is that markets do not like uncertainty but there is a lot of it in the world today. Continuing concerns include the European sovereign debt crisis, likewise the ongoing one in the federal government (and not a few state and municipal governments) and of course, in American households. Residual real estate challenges, partisan politics, and slowing growth in the Asian economies are also ongoing worries. The federal government, through its central bank, has effectively used monetary policy to maintain low interest rates and keep inflation in check. Lacking, however, is the political will and cooperation needed to effectively use fiscal policy and other much-needed government programs such as infrastructural bank reforms, and those that would support regulatory easing to fast-track projects.
... on the Jobs Conundrum
Fareed Zakaria, an interested observer, has noted in his reports that the key issue for America is jobs. I agree with his concerns. Low work force participation is driving income disparities in the U.S. and setting the stage for political turmoil. Americans are clearly frustrated that their own economic outlook is darkening; witness the recent Occupy Wall Street campaign that is spreading across the country. I encourage you to read his blog in which he calls for President Obama to declare a National Jobs Emergency that would enable a fast track to rebuilding the country’s infrastructure and putting Americans back to work.
...on the Third Quarter
The third quarter of 2011 was a frustrating one for investors and non-investors alike, indeed for almost all Americans. If certain things would happen, then the fourth quarter could potentiallybe demonstrably better. The problem is that there remains a great deal of uncertainty and there are far too many “if this, then that” scenarios. Nevertheless, let’s review the events of the past three months.
- The growing debt crisis in the Eurozone and the fear of contagion kept U.S. markets lower, probably even more so than a whole host of lackluster domestic economic indicators. Confidence waned on Wall Street and Main Street, and analysts who had begun to second guess the recovery began vocalizing their concern.
- The U.S. economy crawled forward with occasional flashes of vigor, which were, unfortunately, too few and far between. Take for example, consumer spending, which saw slight rises in July and August of 0.7% and 0.2%, respectively. To some extent, those increases reflected rises in food and energy costs, not necessarily true increases in spending. Americans, in general, held tight to their purse strings, too wary of the future
- The U.S. unemployment rate remained firmly anchored at 9.1% for the entire quarter, and consumer confidence, as measured by the Conference Board’s report, plunged.
- Frustration over the ongoing political posturing among Washington’s elected officials was a key driver of the markets’ volatility. After the long cantankerous debate regarding the nation’s debt ceiling, it was inevitable that Standard and Poor’s would downgrade America’s credit rating. And so they did, dropping it a notch from AAA to AA+; S&P also downgraded those federal agencies reliant on the U.S. government, i.e. Fannie Mae and Freddie Mac. While not unexpected, global equity markets took the downgrade badly.
- President Obama called for bipartisan unity as he introduced the $447 billion American Jobs Act late in the quarter, a program being likened by some to FDR’s New Deal, but the passage of the bill remains in limbo as Republicans are loathe to support a measure that would be funded by tax hikes.
- Under significant pressure to do something to stimulate the sluggish economy, the Federal Reserve did not haul out QE3 as some analysts had expected, but brought back 1961’s “Operation Twist” strategy of shifting $400 billion into longer-term Treasuries to foster growth. Equity markets didn’t look too kindly on Operation Twist, nor did analysts for that matter, who don’t believe that it will make any significant difference in the long run.
- Asian economies, especially China, which is viewed as the driver of global growth, contended with a clear drop in export demand, a result primarily of the world-wide economic slowdown. The silver lining is that slowing global demand could slow down persistent inflation in India and China, seen as a priority by the respective governments.
- The real estate sector is far from healed, though there was some annualized improvement. Mortgages became cheaper with lower interest rates, but bank lending restrictions are still making it difficult for potential homebuyers, though there are fewer of those as a rule. Home sales are lower, as are home prices and building starts, because the majority of potential homebuyers are bargain hunting and looking for a deal among bank foreclosures.
So, how could things be better? First and foremost, the Eurozone’s policymakers need to have a decisive and truly unified response to the debt crisis there, and they must consider and arrange for an orderly default for Greece. A growing number of world-renowned economists believe that a default is in the cards for Greece, and at this point, the only true salvation for the Greek economy. Second, a strong corporate earnings season with some upside surprises would be nice. Third, markets need to get some clear data