Sometimes, There is No Pony
Wall Street has been sifting through the horrific reports out of the Gulf of Mexico. Their rose-colored glasses allowed them to see positives amongst the human and economic destruction: The stimulus of rebuilding, the Fed pausing, cheaper oil. BusinessWeek notes the Street has been “delighted.”
There were significant tribulations to be overcome before Katrina hit, and the storm’s devastation only adds to them.
Consider these sources of economic pressure:
• Oil prices are up almost 300% from their post 9/11 lows, and have more than doubled since January 2004. Thanks to the demand side of the occasion, the economy has been struggling under the costs. To quote Joan McCullough, the supply disruption adds a “double whammy to prices.”
• The Consumer is stretched fairly thin. Inflation continues to snarl; the days of easy cash out refis are behind us. The catalyst for the next round of consumer spending is becoming increasingly hard to see. At the least, I can suggest what it will not be: a significant increases in wages (See the recent Census Bureau report) or a new spurt in hiring. A recent Manpower survey of execs taken before Katrina implied more of the same – lackluster hiring, best described as “lumpy,” with strong regional variance.
• The Federal Deficit, already booming thanks to the unencumbered profligacy of single party rule*, now looks to soar above half a trillion dollars for 2005; And the budget for 2006 is widely expected to be even worse.
• The War in Iraq, and all the costs associated thereto, has not gone away. Our March 2003 prediction for a final tab of a trillion dollars is looking increasingly prescient. Katrina may have blown War coverage off the front pages, but the financial burdens of this endeavor still remains a heavy one.
• (Speaking of which) Off Balance Sheet funding: Since we’re discussing these, let me remind you that a significant chunk of Federal spending is so far “Off Balance Sheet” that it would make the CFO of Enron blush. Its not just the war in Iraq funded via special legislation; The other major expense is FEMA. This “Emergency” spending on an ad hoc basis makes the deficit appear smaller than it really is.
Perhaps it’s a coping mechanism, a form of gallows humor that encourages Investors to see positives in the face of awful destruction. Regardless, it needs to be taken in context – as it points out that markets are not perfectly efficient, and can be as fallible as its Traders.
* Save your emails; this isn’t a political statement, but rather is
an historical observation.
It doesn’t matter which party is in power, but when
it’s but a single, dominant party without a counter-balancing opposition, we end
up with excessive spending.
But don’t believe me, you can look it up yourselves. Or, for a typical example, see this article: No-Bid Contracts Win Katrina Work
TrackBack URL for this entry:
Listed below are links to weblogs that reference Sometimes, There is No Pony:
Could someone explain how the "Stimulus" of repairing destroyed capital goods in the wake of Katrina works?
I thought replacing a destroyed factory, for example, meant you can't build a new factory and get extra output?
Unless someone can explain this to me, I think I'll fund my retirement by smashing the windows in my house and putting sugar in my car's gas tank.
Posted by: hh gwin iii | Sep 13, 2005 6:00:12 PM
The comments to this entry are closed.