First I was afraid
I was petrified
Kept thinking I could never live
Without you by my side
But I spent so many nights
Thinking how you did me wrong
I grew strong
I learned how to carry on
- Gloria Gaynor
If you've ever been in love, you've probably known heartache.
Looking back, you may realize the bad times are what make the good
times so good. Or, you may wish you could only experience the good
times and leave the bad behind. In either case, your feelings are
not too different from market watchers today.
Given all markets move in cycles with good times followed by bad,
it's easy to see there are two ways to look forward from the bad
times. One, realize the pain we feel now only partially offsets the
advances achieved in the good times leaving a net-positive outcome.
Or two, realize the pain we feel now is greater than the advances
received in the good times implying some sort of mutation of the
cycle is in order. Naturally, these two courses lead to differing
outcomes which will drive future productivity trends.
The debate going on today regarding more or less regulation and
larger or smaller government is reflective of the two viewpoints
above. Historically, the drive to increase or decrease government
regulation has also been cyclical, but it is difficult to deny the
long-term trend toward additional government since this country's
founding.
The first viewpoint above stresses the advances that result from
improved productivity over the pain experienced when bubbles burst.
This is a kind of
caveat emptor philosophy, implying it is
up to individuals to realize these cycles occur and to navigate
accordingly.
It could be said the second is a more risk averse viewpoint,
attempting to avoid the downside of cyclical behavior at the
expense of economic and societal gains achieved in the boom times.
This chart
shows gross domestic product (GDP) per individual based in 2000
dollars, thus removing inflationary effects. Over time, economic
advantages have far outweighed economic costs as measured by the
growth in GDP per capita over the last half-century or so even as
boom/bust cycles have come and gone. It could be argued the current
capitalist model allowing labor and capital to flow toward best-NPV
(net present value) uses, unhindered by excessive government
regulation, has allowed this statistic to nearly triple in the last
fifty years.
Today, I see the following four categories of potential increased
government involvement in daily corporate life: oversight of
executive compensation; management of large industrial and
financial corporations; encouraging risk-taking by providing a
government safety net (reduction of the moral hazard); and the
authority to overtake corporations
before they become a
systemic risk.
None of these are marginal changes. These are radical concepts that
will potentially be put in place soon and seemingly without
recourse. The question before the American people is: Does the pain
we are feeling now justify such a broad overhaul of American
business to risk a potential tripling of our economic lifestyle
over the next fifty years?
Key Developments
Housing starts unexpectedly slid 13 percent in April to an annual
rate of 458,000. The second consecutive monthly decline has left
starts at the lowest level in 59 years. The high unemployment rate
will mute a rebound in this sector despite the supply of new
properties being below the rate of households being created
Minutes from the April 28-29 FOMC meeting were released on May 20
and the committee noted there are signs that the pace of
contraction was slowing although near-term economic recovery will
be modest. The committee also expects that unemployment would
remain elevated and inflationary pressures remain subdued largely
attributable to the low level of capacity utilization. Should the
pace of recovery become sluggish, several members reaffirmed their
commitment to expanding the Fed's balance sheet.
SolarWinds, Inc. and OpenTable, Inc. both traded higher on the day
of their initial public offering as public investors show a healthy
appetite for IPOs. The offerings snapped an IPO freeze dating back
to the last quarter of 2008. SolarWinds raised $151.5 million and
OpenTable raised $60 million.