The Marx Brothers had a song about painless dentistry. It went something like “Herman is the painless dentist/ Of his painless work we sing/ When he drills or hammers at you/ Herman he don’t feel a thing!” I think it fits many of the policy decisions from Washington and certainly characterizes the debt ceiling debate. Voters in New York this week voted ‘not’ to touch Medicare benefits. And thus the great deficit debate becomes more heated as everyone recognizes that our growing debt is unsustainable and that something MUST be done to cut spending as long as it doesn’t affect them. It’s a perfect symbiotic world: voters don’t want pain and politicians don’t want to cause it. It’s perfect up to the point that the next crisis develops and none of us have anywhere left to turn.
On the premise that spending feels good and not spending feels bad, feeling bad is inevitable. As a long-time member of the Sibley Memorial Hospital Board in Washington, I characterize the current economic quandary as the choice between a planned surgery and emergency surgery. The consequences, albeit delayed and temporarily softened, from twin bubbles in credit and housing have yet to play-out fully. Once again, markets have not been permitted to clear of their own free-market accord.
The US is facing a double tightening of both fiscal and monetary policies. Europe has raised rates twice, and they are nowhere near seeing daylight in dealing with Greece and her sister sinners. China has raised rates and bank reserve requirements. Global tightening is not a backdrop for economic expansion.
Domestically we continue to be concerned about the consumer and an ongoing decline in housing prices (please see last week’s Market Commentary.) Last year the Federal Reserve promised an orderly removal of monetary accommodation, and they kept their word – briefly.
As the Fed began to end its various stimulative programs, markets declined. The S&P 500 dropped 8% at the beginning of July and an additional 6% at the end of August. The hue and cry from Wall Street was for a double dip recession. In response, the Fed produced a second round of Quantitative Easing known as QE2. It ends in June, and if they keep their word for a somewhat longer period this time, we expect share prices to pull back. THIS IS NOT A CALAMITY. THIS IS NORMAL. While it may be the government’s role to save us from crisis, it is not the government’s role to save us from all consequence.
Markets fluctuate. They neither go up nor down all of the time. Stock index levels have doubled since bottoming in March 2009. A rest is unexceptional.
Bill Griffiths said on CNBC’s “Closing Bell” that we are in an odd period right now when stocks and commodities are moving in tandem.” This “coupled” movement has typified the recent market’s risk-on/risk-off trading. When not scared, investors jump up and swing for the fences. This may be hedge funds or high frequency trading, but it is happening, and Bill Griffith’s is correct that it is an abnormal pattern.
Our feeling is that markets are changing direction. Rallies feel lighter and fail to make new highs while declines feel more emphatic. The result is our long-expected rotation into large multi-national companies that we have favored for some time. This summer bodes to be more challenging than it does robust. We advise scheduled surgery and a responsible and disciplined approach to recovery. All will be well in the end, but neither denial nor blind faith constitutes an investment strategy.
**Special Note** My friend and colleague Mark Haines passed away suddenly last night at his home. I had the pleasure of knowing him for over ten years. From my hours spent sitting next to him on the anchor desk on Squawk Box to our recent weekly Farr and Farrell appearances, I found him to be very smart, funny, quirky but above all honest. He championed the interests and concerns of the individual investor and could be vicious if he suspected a disingenuous fraud. Most important, he adored his children Matt and Meredith. He talked about them a lot. To Matt and Meredith: thank you for sharing your wonderful dad with millions of us for so many years. He was a great man who made a real difference and believed that of all of his accomplishments in life, the two of you were his magnum opus and greatest joy. I will miss your dad a lot.
Hang in there.