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03/03/2009
The Market Is Hard to Please
By
Fred Snitzer
When the year of 2008 finally came to a grinding and painful end last December, we all breathed a sigh of relief. After a brutal period of 14 months, stretching back to November of 2007, the awful year – mired in an endless presidential campaign and a soul-crushing, heart-stopping, panicked-driven market - was finally over. A new year meant a fresh start, a clean break from the past.
But the market, indifferent to our calendar markers and impervious to our hopes, fantasies and New Year’s resolutions, had other ideas. After all, there was still a banking crisis to fix, a housing market to cure, a commercial paper market to soothe, a securitization market to unfreeze, and an auto industry to prop up. There was rising unemployment, declining consumer confidence, timid executives, and fearful employees. A bounce to ease our fears? Feh, says the market. Clean up your problems, first, and then maybe I’ll oblige.
And now the new administration is trying its darndest to fix things: billions in stimulus spending, a bank plan, a housing plan, a TALF plan, and yet another TARP plan. The market’s response so far? Scorn. Pure scorn. This market is a tough audience.
The market has reason to be skeptical. It knows that these problems are large, complex, resistant to easy answers, and vulnerable to all sorts of political solutions masquerading as economic solutions. It also intuitively senses, so far, that the new administration is – following the pattern of the last administration – responding to this crisis in an ad hoc and tentative manner. Obama has a dream team of economic advisors, but they’re still only human, as Tim Geithner proved when revealing the Treasury Deparment’s plan for our ailing banks. The market knows that the devil is in the details, and in the plan presented by Mr. Geithner the details were absent. There was no there there. So the market, merciless, unimpressed, and determined to send a message, plunged 382 points, or 4.6%.
Unfortunately, the worst financial crisis since the Depression and the worst economic recession since the early 1980’s are not over, despite the change in the calendar clock. According to the forecasts of the Federal Reserve, we could see a recovery in early 2010. Or, we could not see a recovery in 2010, and have to wait until 2011. (Economists know better than to make blanket predictions).
We do not think we will see an unemployment rate of 25%, or a massive failure of banks, or a Dow Jones at 3,500. Still, when the PMA investment committee met on Tuesday, February 24th, we decided to err on the side of caution and agreed to keep allocations at their current levels until we see a greater degree of stability in the markets. We will not be re-balancing back into equities at this time.
As day follows night, and winter follows fall, we will see a recovery. We don’t know when, and we don’t know what form it will take, but we will see it. We have learned some things during the 80 years since the last Depression, and the 30 years since the recessions of 1974 and 1982. And though the government will make mistakes as it tangles with the complexity and opacity that characterize the current financial crisis, they will also get some things right, too. If the fiscal stimulus works, great. If it doesn’t, we’ll adjust. The same goes for all the other things the government is trying to do. We would all prefer that we were not part of some giant economic science experiment, but this is the world we live in. To end with an obvious cliché: better to try and fail, than to not try at all. Doing nothing was what the government did in the 1930’s. They won’t try that again.
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