A week ago, when the world was ending, this blog was overrun with fearmongers and bad advice. The morons at S&P had just downgraded the debt of the world’s richest country, where the most profitable corporations live, and which produces the global reserve currency. Suddenly we heard rumours European banks were about to keel, and investors stampeded for the exits. It was classic panic.
I wrote: “Why would people drop their pants over a 5.5% market decline, rushing to turn paper losses into real ones, buying bonds yielding next to nothing, just so they can make less than they were before and pay a higher tax rate on it?
“Because they’re fearful. They do not see a floor in front of them, just a yawning, gaping, economic chasm leading surely to a rerun of the Thirties. But there’s none. This is not a systemic financial collapse. It’s no Stockageddon. America’s not insolvent when the world rushes under its skirts for safety. No depression coming. Hold the locusts and the plague.
“It was just a crappy day, likely followed by some more. And then it gets better – because companies are profitable, the economy’s expanding, emerging markets still emerge, technology is rampant, nations are woven in response and every politician alive just got cuffed on the side of the head.”
As you know, since then markets recovered. The TSX had one of its best weeks in a long time, gaining 3%. As I stoke this saucy blog, Dow futures are ahead and commodities (including gold) lower again. Bond prices are up, yields down. Doomers looking a little foolish.
What changed in a week?
The Fed spoke. Interest rates will stay low for two years, at least in the US. This means the longest period of the cheapest money in American history continues. That helps keep corporate costs down and profits up, supporting equity markets. It also speeds setting a floor for the battered real estate market Stateside, a prerequisite to serious economic growth.
We also got news of more fat earnings – from companies like Apple, Disney and Cisco. Remember, almost 70% of corporations have surpassed profit expectations this year, and CEOs are sitting on a trillion in cash. These guys have created operations which are more efficient, leaner and global than ever before.
Last week the Europeans started getting their act together. Central banks bought the bonds of reprobate countries like Italy and Spain. No banks failed. And it dawned on more people that this is a radically different time than in 2008. Then we had big banks wobbling and falling under the weight of toxic debts. This time we have indebted sovereign states – nations which can solve their problems simply by raising taxes and creating revenue. It’s not that politicians can’t. They just lack the stones to do so. But that may soon change.
And speaking of politics, the Republican-Tea Party masses just confirmed their collective nutbar status by boosting Michele Bachmann into the contenders’ circle for the 2012 Presidential nomination. The 55-year-old Congresswoman has core beliefs that would bring the 1930s wafting back. Slashing taxes and forcing a mandatory balanced budget. Massive spending cuts, including to health care and public pensions. No increase in the debt ceiling and, had she been prez, a decision to let Citibank, General Motors and Chrysler fail.
In a country with way, way too many people out of work and the middle class decimated by a real estate depression, this kind of robber baron thinking suggests the right-wingers are massively out of step with mainstream thought. And markets like that. The last thing the US (and Canada) needs is a mess of bible-thumping, laissez-faire, protectionist pilgrims with their burnished fingers on the levels of power.
Worst of all, pilgrims hate stimulus. And more stimulus is what we’re about to get.
In short, at the pit of last week markets were down about 16%. Equity investors and stock mutual fund holders were sliced and diced. Bond investors, in contrast, made money. Those with a balanced portfolio lost about one-quarter of what the markets did, and will recover much faster. Folks who have cash and use it to buy great companies (through ETFs) caught in the stampede will likely not regret it.
So, I’ll say it again. There is no systemic financial collapse. No stockapocalypse. No bankrupt America. No depression. No 2008. Fear and greed will continue to spin, but no news there.
Remember. In balance and diversity, there is strength.
Damn, that sounds like some New Age crap. I’m swearing off yoghurt.