Monday, October 25, 2010

View of the Lip

The stock market's rally in recent weeks suggests to me that Wall Street has caught sight of the lip of the Great Crater, meaning we may soon emerge from it. I suggested recently that the gravitational effect holding the Dow Jones Average down from escaping the 10,000 level it first crossed over a decade ago may be weakening, though whether the future curve is a parabola, a space shot, a hyperbola, or just hyperbole remains an entrail this oracle cannot foretell.

One thing that is definitely not worth cutting the goat open to find out about is this tripe that this recovery is "Wall Street pricing in a Republican Congress." If it is, then there is certain to be a steep retrenchment. Not that the Republicans will not gain control of the House of Representatives--one wouldn't bet against that without pretty steep odds (see my post soon on Intrade odds for the election)--but that is not control of Congress, for the Senate is very unlikely to go over.

Even if the Republicans could gain control of both houses of Congress, this explanation of the run-up would suggest that would have some positive impact on future business earnings. Simply put, there is no reason to believe that. First, if you believe Tea Partiers, they would allow companies to fail a lot more than the Democrats' strategic bailouts or the Bushites' cronyist porkmongering have done, and this risk alone should damper exuberance. Beyond that, don't believe the hype about repeal of Patient Protection and Affordable Care Act: there is a little thing called a Presidential veto which makes that totally impossible, at least for the next two years, and I would not even believe the more modest goal of repealing the mandates for (larger) employers to offer insurance or individuals to get it, weak as those mandates are. One should look similarly askance at the humpty-dumpth Congress removing the "excessive regulations" or "uncertainty" which some allege are holding back the recovery, let alone the possibilities of tax reform (which is unlikely under any political scenario, ever).

No! The recovery is real, it's underway, and though unemployment has not emerged from its cratering, the conditions are rapidly becoming propitious for some small but steady improvement in employment conditions. Government entities--Congress, the President, or agencies--will try to facilitate this through whatever measures they can come up with which will not directly increase the deficit, for which there is very little support of any kind.

There is one other interpretation of the rally, though, one less optimistic than a real recovery, but more substantial than trading on partisan belief in Republicans of any stripe. That would be the dollar decline theory: To reduce the real cost of the debt we have been incurring and to improve exports and reduce imports, the Fed, working with other economies, has been working to depreciate the dollar, and the US stock market is just treading water, maintaining its value by increasing at the rate the dollar declines. I can't really disprove or gainsay this theory; the test will be in part if the recovery outlasts the easy money strategy, in part if jobs--for whatever--begin to return to the economy. Though there is plenty of room for employment to increase, I have not changed my pessimistic long-term view that we are in a 10-20 year poor labor market.

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