Friday, May 21, 2010

When Will The Equity Market Stabilize?

The good news is that we are probably not too far from the bottom of this stock market slide. As folks get more and more pessimistic, the chances of a rally increase. We are not there yet, but we are not too far away now.

One reason you know a rally is near is that Nuriell Roubini, the modern Dr. Doom, called for the equity markets to drop 20 percent from here today. He did not feel that way six weeks ago at the top, but now that the markets have lost 12 to 15 percent, Roubini has become a bear, joining the growing chorus of bears.

The news background isn't good, but there is hope. The hope is that what is truly plaguing the western economies is coming to light -- big governments and entitlements. These albatrosses weigh heavily on the US and Europe and will not go away. But, the good news is that they are now being discussed and making the news. Only Obama looks the other way. The rest of the world is now frightened to death about the growing and obvious collapse of the European welfare state (and it's political unity).

Our future and that of western Europe is economic stagnation, but equity markets are taking that into account. Stock markets can go up during economic stagnation and, at some point in the next few weeks, stock markets will begin grudgingly to rally.

The great tragedy is that low income workers in the US and in Europe will suffer greatly over the next decade or so thanks to the European welfare state and, in the US, thanks to Obama and his Congress. It will be impossible to employ large numbers of workers who are in the bottom half of the skill spectrum or who are "protected" by legislation. Small businesses will look for ways to avoid employees (they already are). No one wants a work force anymore -- not in the US, or in Western Europe.

But, stocks can still increase in value even if large numbers of our citizens are in pain. The only way to get employment going is to make employees cheaper to employers -- mandates and restrictions take you the other direction. Politicians advance policies that guarantee that our most at-risk citizens have no access to credit and no access to jobs.

No doubt Bill Gates and Warren Buffett will be pleased. They can shift their income around to avoid taxes and their companies will prosper even as they shed employees. So, they will continue to support increasing suffocation of the private sector, but businesses can figure out how to do without employees. They are doing that now and will do that in the future. Thank you, Mr. President.

So, look for equity markets to stabilize, especially if European politicians shut up and go back to the golf course. If European policy makers continue to look for heroic solutions to what are very obvious (and mundane) problems, then the stock market rally might get postponed for a while.

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