Market Commentary for the week of December 22, 2008

Holiday jeer.
Does every fiscal crisis come wrapped with a political bow around it? It may be too soon to tell if monetary intervention, like the Federal Reserve offering “free” money, is the right solution for the problem, but my data seems to confirm that the response to these initiatives is tentative and dubious, at best.

Household tensions have certainly not lessened, and the will to spend is simply not there. In fact, despite a flood of liquidity, the velocity of lending is slowing, indicating that financial institutions are more than willing to hoard their newly-found largesse and to limit their losses to bad loans already on the books.

The belief that liquidity will solve an inert economy has proven, in this case, at this time, to be false.

Liquidity is not economic “grease”.
Beyond using traditional tools to invigorate a sagging economy, central banks and politicians need to foster an era of transparency and confidence, variables shattered even greater by the Bernie Madoff mess last week. Our leaders need to rush now to stem the tide of depreciating assets and declining confidence. If not, 2008 might only be prelude to an even more rupturous 2009 economy.

I might suggest that more liquidity could exacerbate the confidence crisis. How? By proving that the “better mousetrap” theory of invention and production is not the engine which drives consumer demand, but rather scarcity, fear of being left out, and desperation. Easing notwithstanding, the trap we face is to fall further into declining asset values, stagnating industrial expenditures, and inertia.

How much longer?
Our best hope is to try to lessen the duration of the current global stalemate. Many believe that budget and monetary transformation might have a cross-border effect of adjusting currency or regional imbalances, providing incentives for commerce to accelerate. From a purely proprietary perspective, the United States needs outlets for its sagging production and growing inventories. The dollar’s decline is offering that outlet.

With or without additional liquidity or spending packages, policymakers must address the confidence crisis. Reaching further than any other obstacle, the public’s perception that they are in peril, that their financial institutions are in peril, immobilizes capital like no stimulus package can assuage. There’s nothing left “in the tank” for many. It is unclear how they are going to dig out from the depths of poorer prospects.

Across the globe central banks are easing money, attempting to unfreeze the corporate and private sectors. The bottom line for market performance, and economic recovery, is not liquidity, but, rather, building profitability in proportion to higher expectations for shareholder value.

As soon as this tectonic shift occurs, the markets will expand.