The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.
It feels like we're swimming
It feels like we're stuck in between
A rock and a hard place
We've been through the heartaches
And lived through the darkest days
times, investors and traders use economic and market data to drive their
decision-making process. When the
economy is growing, inflation and employment are stable, and earnings are
solid, investors look primarily to data that would show any sort of stumble in
these three measures.
the better part of my investing career focused on these three areas and largely
ignoring legislative action. The Fed,
being focused on the economy in a non-political manner, would simply offset any
action from the rest of Washington as the effects of new legislation began to
come forth. If Congress enacted laws
that would slow overall growth, the Fed would simply hold rates at a slightly
lower level. If policy was too loose,
creating the potential for inflation, it would hold rates at a slightly higher
level than it would otherwise.
are a far cry from "normal," of course, as the volatility seen in market levels
clearly demonstrates. Today, instead of
investors focusing on growth, inflation, employment, and earnings, investors
are primarily focused on the next action out of Washington.
crisis played out in 2008 and 2009, government activity took a prominent role
in shaping the course of investment prices.
First, the knee-jerk reaction toward safety, including a multitude of
bailouts and dropping of interest rates, helped to quell the terror-level of
fear that permeated investors at the height of the crisis.
Then came a
number of "stimulus" projects. I define
"stimulus" here as any action by government to promote growth in the economy; including
the publicly labeled stimulus packages under Bush and Obama, these actions
total somewhere around $1 trillion.
to, or as part of, those direct stimulus packages, the "Cash for Clunkers" program
got the most play in the media and turned out to be quite a dud assuming the
objective was to promote an overall economic recovery. Sales for cars were simply pushed forward one
month causing, if anything, a short-term disruption in the supply chain. Looking at auto sales over a longer period,
there is no evidence of increased auto sales.
There were many
other programs, of course, particularly in the housing industry. The $8,000 first-time homebuyer incentive is
interesting when you consider some quick, back-of-the-envelope math that
reveals participants have seen their home values drop around 6.5%, negating
these stimulus ideas have led to $1.1 trillion in GDP growth since the bottom
in the second quarter of 2009. Stripping
away the $1 trillion or so of "stimulus" projects, we find a net zero effect on
the remainder of the economy.
If the goal
was to get us to the other side of the riverbed – where the economy operates on
its own - it's clear these short-term "boosts" are not working.
well-worn metaphor describing our economic experience as "crossing a riverbed"
these programs were designed to smooth out the bottom while we waited for a
longer term solution that would get us to the other side. We still wait.
In the last
month, we've seen a focus on another round of short-term solutions, still with
no discussions of a long-term strategy for our economy.
soft promise from the Fed to keep rates low into 2013
of a QE3 or other manipulation of the Fed's balance sheet
push for easier home refinancing, targeting those who are current on their
mortgage, but under water
alterations to the tax code or potential tax holiday
of unemployment benefits
these programs may be worth pursuing, but let's not kid ourselves that they
will lead to a long-term recovery.
Instead, these are designed as short-term stimulus projects that will
provide a further smoothing of the riverbed.
In 2008 and
2009 this was clearly the correct goal of government policy. But here in 2011 we should be more strategic
in our approach to the economy.
approach I have long advocated is to rebuild the way credit is provided to the
typical homebuyer. This is where our
current struggles began as the old system imploded in spectacular fashion. Unfortunately, debate around the economy has
oddly ignored this important function.
In the past, I have somewhat simplistically referred to this as "fixing"
Fannie and Freddie, but that's really only the first step.
Today, as a
result of the mortgage market implosion, homeowners – or, really, consumers –
are left with enormously volatile exposure to an asset that may not be worth
much on a net basis. This new massive increase to their wealth volatility has encouraged them to
delay or cancel many marginal expenditures that have become a part of the
overall economy in favor of savings. Add to this a struggling global
economy and there is no solid consumer that the world's producers can rely
this barrier to recovery will not drive growth alone, but it seems clear this
wealth volatility remains a tremendous obstacle between us and the upslope on
the other side of the riverbed.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
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