Market Commentary for the week of March 1, 2010

New order.
I’m particularly interested in some new balances in my work, particularly the inversion of balance between the United State’s financial markets and the “rest of the world.” Remember the old adage “when the U.S. sneezes the rest of the world catches a cold?” Well, by the way my metrics stand out today, the American financial system is experiencing a not-so-subtle negative shift in political and economic power.

Not necessarily owing to our debt, but not helped by it either, U.S. output is burdened by expectations and obligations that are becoming increasingly harder to meet. U.S. GDP shows a picture of a country, in the abstract, that has relinquished control of its destiny to outside forces beyond its control. Our savings rate cannot get above water; our fiscal capability to fund strategic and discretionary objectives is limited; and political capital, our best moral hope for global persuasion, is hostage to outcomes in areas of the world that have no relationship to Main Street, USA.

In addition, our biggest creditors are rethinking their own sovereign requirements and pulling back on spending.

Defined by debate.
To be sure, it is a credit to our own system that any debate can be held in an open forum. But results are more important than process, and right now the financial markets seem inert (except for the speculators and day traders) and caught up in their own fear of profit diminution. As with most things I study, I am optimistic about long-term solutions. However, the absence of solid earnings-driven opportunity domestically has my focus looking elsewhere, and my attention in the short-term.

Despite that fact, even the “rest of the world” is caught up in financial and social uncertainty. Therefore, we need to focus on telling the right story to come up with the right answers.

For example, we, or any other nation, cannot go on an unlimited spending spree without being able to pay for it. The shortsightedness of global treasuries and corporate capital didn’t just happen; it was a process encouraged, in part, by low interest rates and fueled by greed, consumption, and arrogance. Those responsible should be required to “pay us back” for their hubris, the way a drunken reckless driver makes restitution for hitting his neighbor’s garbage pails at 4am.

In this debate, there is no right or wrong, nor are there simple answers.

Seasoned by time.
Historically, we experience trends over time, as parabolic phases up or down. We don’t define them as “reckless” or “stupendous,” only by magnitude and amplitude. Prosperity is not a point in time, it is a notion. Inflation is not a date specific, it is a trend factored by time. And as these trends meld together we observe opportunity or chaos. The value of these data is as unique to each observer as each observer’s perspective. Yet, when taken in sum, the trend is easily identifiable, quantifiable, and immutable.

For example, although we feel “less rich” and the markets grind more slowly, there is, nevertheless, and inflection point of opportunity today that defies many contradictions. The promise of a turnaround will not mitigate the cruel side effects of past nasty behavior, but it can imply that the answer to hard political and fiscal questions might be around the corner.

Energy dependence, bulging financial deficits, an aging population and infrastructure, are all topics at an intersection which presents opportunity for problem-solving and capital gains potential in the next half-decade. As a result, it becomes less problematic when the markets seduce us with daily upside eruptions.