Obama's Jobs Plan: Saving His Own
Yet another day in the yo-yo chronicles. The markets tanked once again, reverting to their extreme behavior of last week; European banks groaned under the presumed weight of unresolved debt burdens; and American economic data, ranging from the Philadelphia Fed’s manufacturing survey to jobless claims, suggested that, yes, Virginia, there may be a Santa Claus, but his bag this year is shaping up as decidedly thin.
Not surprisingly, the net effect of these pressures has been to pummel public confidence and send both Congress’ and President Obama’s approval ratings on the economy plummeting to the teens and 20s, according to the most recent Gallup poll, released yesterday. And not surprisingly, the net effect of those pressures has been to spur the White House to prepare a major new initiative to stimulate economic activity.
Why Markets Freak Out
In case you stepped away for a few bucolic summer days, emulating Nicolas Sarkozy and much of France itself, you probably noticed that global markets swooned yet again on Wednesday to the tune of nearly 5 percent down before staging an equally impressive comeback on Thursday. The latest precipitating cause of this yo-yo action was a rumor that Société Générale was on the verge of insolvency and about to implode.
The rumor was placed front and center by a story run in The Daily Mail in the U.K., which claimed that the French bank was in a perilous state because of its $4 billion exposure to Greek sovereign debt. That story was enough to ignite a new round of fear that the European Union was about to witness a financial meltdown and that France might soon be downgraded much as the United States was late last week.
Why Markets Are Melting
Welcome to the crash of 2011. With stunning speed, global markets have sold off to a degree not seen since the worst days of late 2008 and early 2009. In fact, only three times in the past 40 years have stocks sold this hard this quickly, with a 16 percent decline in the S&P 500 in a 10-day period surpassed only by drops in the Octobers of 1987 and 2008.
No one can say precisely when or why this will end. Its triggers we know: a flawed debt deal in the United States, renewed sclerosis in the European Union about peripheral debt issues in Greece and Italy, a downgrade by Standard & Poor’s of U.S. sovereign debt (oh, the irony of S&P downgrading debt leading to a precipitous decline in the S&P index), and then a wave of global selling. No market has been immune; not one.
S&P Goes Tea Party
Big headlines for a Friday night: “U.S. Loses Top Credit Rating!” Yes, as most now know, Standard & Poor’s went ahead with its warnings of the past weeks and downgraded the sovereign debt of the United States government from its pristine triple-A to a still stellar but one notch less so AA+. And after a miserable week in global equity markets that was almost as ugly as it gets, a week that began with the conclusion of a universally reviled debt-ceiling deal, the late-night downgrade was the fitting end.
The symbolism is undeniable. This is the first downgrade in history, as commentators rushed to remind us. But of course, that history goes back only to the late 1930s, when the ratings agencies began to hold sway. And S&P is the only one of the major three—Fitch, Moody’s, and S&P—to downgrade. So this was big bad news, a bad coda to a bad week, but only as news and not as a trenchant analysis of the creditworthiness of the United States or its ability to meet its debt obligations going forward.
So there you have it. The debt deal is done, and all that remains is for a ritualistic i-dotting and t-crossing, along with the howls of protest from left and right that their bedrock principles were violated in order to save the U.S. credit rating. But make no mistake: While Washington muddled through at the witching hour and avoided sending the global economic system into the vortex, what unfolded over the past few weeks will have repercussions, and they are not good for America.
Don't Bet Against Apple
Let it be acknowledged that Apple, from which Steve Jobs has finally resigned as CEO after years of battling pancreatic cancer, is no ordinary company. It is the most powerful, successful, and innovative consumer technology company of our age.
That it is so a testament to Jobs, to his passion, his vision, his uncompromising mania, and his unwillingness to cede control. He has, by all accounts, been a difficult man to work with and for, and he has undoubtedly left many wounded employees in his wake. But he also has provided a ray of optimism about the power of technology to channel our collective energies for a better world. Cynics beware: Apple is the opposite of cynicism, and its success is a reminder that you can’t short your way to fortune and power. You actually have to create something.
Where's the Optimism?
In the past three trading days, U.S. markets recovered everything they lost last week. In the wake of S&P’s disastrous and ludicrous downgrade, the major indexes lost about 8 percent; since then they’ve gained that entire amount back and then some.
The rapid moves down last week led to a wave of analysis, portending a market-predicted double-dip recession, a waning of corporate profits, a worsening of funding crises in Italy, Greece, Portugal, and the entire European Union, and perhaps a collapse of fiat currencies ranging from the euro to the dollar. The moves the past three days, therefore, should have occasioned a wave of analysis heralding the stability of the U.S. economy, the health of the EU, the resurgence of Japan post-tsunami, the continued strength of China, and the ongoing commodity and industrial boom throughout the world formerly known as emerging.
It's Not the Economy, Stupid!
Over the past 48 hours, global markets have lived a life cycle, from panic and fear through uncertainty and confusion, and then, finally, euphoria. The individuals and machines placing the trades have been along for the ride, and if you stepped away for lunch or coffee, you risked exiting the movie at a crucial plot point, asking distracted friends and colleagues, “What just happened?”
What happened was a flash crash followed by a flash rally. It’s too soon to tell if the carnage in the markets are over, though it is telling that the reaction to President Obama speaking in homilies on Monday was a rash of selling, while the reaction to Ben Bernanke and the Fed announcing another year and a half of astonishingly low interest rates was a rash of buying. Obama said nothing that would satisfy the desire of market makers for clarity, promising only committees, process, and indomitable spirit. Bernanke and the Fed, though not unanimous in their assessment, offered a clear future of cheap capital and low rates. That at least was something on which to hang hats, and so investors did.
Global Markets Spooked
And the beat goes on. Global markets have begun to digest the fallout from Standard & Poor’s scurrilous downgrade of American sovereign debt, and equity markets in Asia and Europe opened lower. Odd pockets of perceived safety rallied, like Swiss francs, and of course gold soared, as investors attempted to win the game of musical chairs on the deck of the Titanic.
All of this unfolded against a backdrop of European Union finance ministers rumbling into action to prevent a further slide into panic over Italian debt issues. It’s a shame that Shakespeare only wrote of winters of discontent, because the past weeks have surely ranked as a summer of malaise.
Wall Street Is Irrelevant
Carnage on Wall Street came fast and swift Thursday, triggered in part by a raft of European selling on the heels of less-than-reassuring remarks by the president of the European Central Bank. But that alone can’t account for a day that saw stocks down almost 5 percent—the worst day since the nasty days of February 2009.
As someone who manages money for clients, I can say that I wasn’t fully prepared for such a drop, or at least not in one day. I have been cautious for some time, as sentiment has turned negative about everything from the global economy to the fate of the United States in post-debt-deal land. Even two-plus years after the meltdown, the psyche of the financial class remains fragile, and Thursday showed that what happens anywhere in the world will ultimately reverberate everywhere in the world. Thursday's selling was indiscriminate, programmatic, and undoubtedly made a few people big money as the vast majority swallowed losses.