Friday, June 16, 2006

Little Bounces

Conservatives would like you to believe that Bush's recently rising poll numbers are signifigant. But, they aren't. Bush's approval ratings hit historic lows in May, dropping to around 30% and they've bounced back since, but they're still in the 30s. Going from the cellar to the ceiling of the cellar isn't a big deal.

Conservatives would also like you to believe that the stock market is now backing Bush, based on a few recent positive days for the Dow Jones Industrial Average. But, that's after some major corrections that started in May and some massive losses of shareholder value that have not yet been recouped. The global equity markets, exclusive of the U.S. and especially with regards to the emerging markets, have also recently shown losses. Also, that's after corrections in commodities markets (that aren't supposed to correlate with the stock market) and losses in both domestic and global bond markets, not to mention the still-diminishing power of the U.S. dollar.

The Dow was, recently, at 11400. Since it reached that point, traders have taken profits and losses for the index have shown that. Also, the markets seem to be moving without much regard to Bush-related news items like the killing of Zarqawi -- we have a new Federal Reserve chairman and traders on the stock and bond markets are unsure of how to interpret his statements and of how to predict what he'll do about interest rates. On the latter point, even if Greenspan were still in charge, traders would be confused because we're currently at a point where a rational Federal Reserve chairman could either hike rates a few more times or leave them steady. Pretty much nobody is sure about whether the Fed should hold steady and allow a relatively accomodative money supply policy to keep pushing GDP growth or whether it should raise rates a bit more in order to settle things down and ward off inflation. Seriously, lots of people have opinions about it, but nobody knows. That uncertainty is reflecting itself in international stock, bond and commodities markets as volatility.

As the mid-term elections approach, conservatives will loudly interpret any rise in the Dow as Wall Street's yearning for a continuing Republican majority in congress. But, it's all B.S. And, if Democrats claim any fall in the Dow is evidence of Wall Street clamoring for change, that's B.S. as well.

My take, for what it's worth, is that the markets (especially the US domestic stock market, which is the most liquid of them all) are volatile right now for reasons that have little to do with politics -- traders and money managers just don't know what the new Fed Chief will do, they don't know what the boom in commodities prices (and decline in the dollar) will cause and they don't know whether or not the U.S. should be pursuing growth or price stability (because globalization has changed a lot of the old rules of economics).

One rule of economics that globalization has changed, by the way, is the the rule that says that the economy can fall into a war of escalation between the price of U.S. labor and the price of goods sold. In the 1970s we saw years of that war. Wages went up. Prices went up soon after. Wages rose again, then prices rose again. In a globalized labor market, where companies can more easily outsource in pursuit of cheaper labor, we're seeing prices rise in a real but not dramatic fashion and stagnant wages. We've never dealt with that situation before. Economists are left wondering if wages will eventually jump or if prices will fall or if this is a sustainable situation. Nobody on Wall Street really knows. Are the old rules still applicable? Are suggestions about new rules as doomed as the last decade's blather about the "new economy" turned out to be? Nobody's sure.

When folks are confused, you get volatility. The Dow runs up to 11,400 but then it drops below 11,000 as people take profits. Then, it runs up again. And traders will cash in their winnings again and it will drop.

This kind of thing says near to zilch about politics, though. The market needs to get used to a new Fed chairman and it needs to make sense out of the impact of globalization (not just as it pertains to labor but as it pertains to the new international competition for resources that has diminished the influence that the U.S. once enjoyed as the largest buyer of raw materials and energy). To put it more quickly: the big players in the market are trying to make sense of these very interesting times.

Sometimes, the stock market is a good measure of political desires. Right now, I'd say that it isn't. There's a lot of chaos on Wall Street and a lot of well-reasoned but conflicting opinion at work. At the moment, I doubt the Street is saying much about preference for Republicans or Democrats. What it is saying is that some things have changed so radically that it's not sure whether to abide by well-tried rules or to adapt them. This is the kind of market where it takes the mind of George Soros to make a fortune and where the pundit class should tread carefully when trying to divine the political signifigance.


At 12:25 PM , Blogger Matt said...

Nice post, thanks. WRT "Little Bounces," I always love how the Cons seem to think public opinion polls mean nothing when they are not in their favor. However, they seem to have no problem with poll numbers when favorable.



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