Market Commentary for the week of August 15, 2011

Peril.

Has the market’s crisis been averted because Congress passed a debt-ceiling bill or because the bear panic last week “wiped out” a lot of doubters?  Not at all.

One can forget the immediate knee-jerk responses.  The most powerful ally we have now is time.  The indecision and ambiguity which triggered the panic is still firmly entrenched in boardrooms and kitchens around the globe.  Multiple solutions only confuse the market’s direction.  While spending and stimulus are probably what’s needed to avert a recession, neither is going to happen in this climate of political intractability.  The presidential election now becomes the end-point in achieving even modest resolution.

Look for the global markets to take their cue from us, and to remain inert for at least another year.

While these fractious debates carry on, the volatility indices are likely to heat up.  Debt and uncertainty cause market paralysis.  The same deja-vu scenario is likely to play out at least once more in the next twelve months.  Political discourse, or lack thereof, can only carry speculation so far.  Otherwise, the real world sets in and produces default inertia.  Lack of confidence breeds negativity, negativity breeds lack of confidence.

Stay the course?

During this time, economic data also stagnates.  Manufacturing, demand, and earnings are falling to depths not seen in decades.  This obviously impacts upon recovery (capital expenditures).  Lower profit margins mean lower stock prices.  How long can the global economy sustain negative numbers?

As the job market erodes, so too does discretionary spending (demand).  The cycle begins all over again.  This now becomes a matter of priorities, but our political leaders can’t even agree on which ones and which hierarchy.  The worry is no longer about compromise or solutions, but about winning or losing political favor.

Whichever side or point of view wins, the markets are likely to be evenly divided in their response, and likely to remain undecided and inert.

Methodology wins.

It is important to separate the current short-term mania from the larger systemic fundamental flaws that govern the economic landscape.  We may forget the Congressional debate in three months time, but we cannot afford to forget the greed and foolishness which manufactured a leveraged global debt crisis for more than a decade.

A standard critique of both the markets and investors is that their focus is too short term oriented.  So too are the Wall Street analysts whose quarter-by-quarter projections influence speculation in fundamentally sound companies, or the boardroom chieftains who manage their companies to assuage the analysts’ quarterly projections.  It would be nice first and forever to break this unseen bond between these unwitting conspirators.

Besides the incidental risk, there are systemic flaws in capital management.  Not all profit is socially responsible.  No one should die from hunger or lack of healthcare.  Anywhere.  That would be a burden too great to live with if you had the means, delivery system, or product to remediate the suffering of the human condition.  The lack of attention paid to Somalia, and even the U.S. Appalachian region, should shame many, and make the rest of us think a little harder about where our priorities lie.

Get with it.  Solve something bigger than your next car payment.