Monday, December 8, 2008

The financial market conversation has turned decidedly pessimistic in the last three weeks. You frequently hear the comment that "there is a lot more negative news yet to come." Undoubtedly unemployment will grow over the next several months and businesses will struggle with declining demand. That much we all know. Wouldn't it be reasonable to assume that stock prices know that as well? Why should the stock market be oblivious to what everyone seems to assume lies ahead?

My suspicion is that the market has made its forecast of a recession by declining a wopping 40 to 45 percent already and is now in the process of bargain hunting. No doubt there will be more days like last Monday, December 1st (a day that saw the market get crushed by 9 percent over the trading day). But, today, the market is higher than it was on last Monday's close, which is a message of sorts.

The unfortunate problem for markets is that we have effectively nationalized our financial service industry. We are soon to nationalize our Detroit auto industry. Key Congressional officials believe that they know better than the market does who should receive credit, what kind of cars should be built, and who should be paid what. These new features of the landscape do not hold great promise for the future. One hopes that president-elect Obama's plans for a $500 billion spending program will not carry "rules-of-the road" for US industry similar to the catastrophic National Recovery Act of the Roosevelt Administration, which turned a three year downturn into a decade long disaster.

Obama deserves an A+ for his appointments on the economic front. Geithner, Summers, and Volcker are first rate appointments that should provide some solace for disappointed free marketers. While, all three of these gentlemen are "interventionists," they are very smart, independent minded, and will try to do their best for their country, even if some of their political friends object. Obama campaigned on a lot of foolishness, as did McCain, perhaps these three can keep things from getting out of control.

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