When world leaders get depressed, there is reason to be optimistic. Find out how the “driver safety paradox” relates to political gloom and doom – and why a market rally could be in the cards.
"This recession might linger for years. Our economy will lose 5 million more jobs. Unemployment will approach double digits. Our nation will sink deeper into a crisis that, at some point, we may not be able to reverse."
– President Barack Obama on the dangers of stimulus delay
Your humble editor is feeling pretty okay about the state of the world right now. Or at least, more so than in recent weeks.
Put it down to contrarian instinct, maybe. When U.K. Prime Minister Gordon Brown let slip he thinks the world is in depression – after modestly suggesting a few months back that he saved it – I can’t help but snicker.
Or take what’s happening with the stimulus bill. America’s cool-as-a-cucumber-in-a-bowl-of-hot-sauce president, whose old nickname is “No Drama Obama,” is laying on the drama with a trowel right about now (see opening quote to this piece).
A crisis that “we may not be able to reverse?” As in, ever? C’mon now, Mr. President. That’s a bit rich.
Sounds like our new Prez needs a long pull on the ol’ hope flask. Might I suggest the soothing words of Gideon Gono, a.k.a. Zimbabwe’s “Mr. Inflation,” as spoken to Newsweek a few weeks ago:
What keeps me bright and looking forward to every day is that it can't be any worse. And those who have studied the history of economies know that we are down, but that the only thing that can happen is we will move up.
"What recession?"
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Gloomy Can Be Good
More seriously, though... the way I see it, it’s good news that White House rhetoric has gone from soaring on the wings of hope to plumbing the dark recesses of fear. Why? Because it shows a degree of seriousness that was sorely lacking before.
The Democrats are going to have to clean up their act to get this precious stimulus bill passed – which shows that Republicans are finally doing their jobs. (A little time in the wilderness never hurts it seems.)
As I lamented last week, the opening-round version of the stimulus bill was a god-awful mess. It stank. It was the product of triumphant back-slapping, blatant partisan hackery, and business-as-usual tactics of the very worst kind.
So when we get to a place where super-Keynesians like Paul Krugman are hyperventilating over a little principled opposition while political commentary sites run articles like “Obama losing stimulus message war,” that’s a material improvement. It ain’t Xanadu, but we’re at least in a better place than before.
So why is it that gloomy beats sunny when it comes to political mood?
It’s a bit like the driver safety paradox. Situations on the road that “feel” safe are often dangerous – while situations that feel dangerous are actually safer than appearances suggest.
It all goes back to complacency. Who’s paying more attention: the driver talking animatedly on his cell phone as he navigates a familiar highway on-ramp, or the driver creeping up a foreign mountain road with no signs or guardrails?
Because the first driver perceives no risk, his odds of death by car crash are much elevated. Because the second driver has all his senses on high alert, his odds of making a fatal mistake are much reduced.
Fear concentrates the mind, as it were.
Expect the Unexpected
I'm writing this in the wee hours of the morning, and thus don't know how the market will trade today (Friday).
I can leave you with a morsel of positive food for thought, though: This feels like a market that’s tired of going down.
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Note the clear turnaround action in Thursday’s trading for the S&P 500 ETF (SPY:AMEX). As Yahoo Finance reported in Thursday’s closing wrap-up:
Financials were down as much as 4.7% in the early going, but managed to climb to a gain of 4.1% after analysts at UBS stated that bank bailout news could induce sizable rallies. Senate Banking Chairman Dodd told reporters it might be possible to modify its mark-to-market rules, which would be a boost to banks hurt by write-downs. Financials finished the session 1.4% higher.
From more than 4% down to better than 4% up at the highs is no small swing. This positive sentiment could be thrown into a cocked hat by more egregious blunders from Washington... but we’ve survived folly, and for now the key thing is that the old “animal spirits” still exist. A major market rally would surprise the heck out of a lot of folks at this point – which is why I’m not willing to rule out the possibility.
Just to keep you on your toes, I’ll have another round or two of optimistic observations for you next week. What’s more, we can get a little discussion going if you like. The questions du jour: Who’s more likely to be right at this juncture, the optimists or the pessimists? Does this market have a hope in Hades of making a major move higher, or is that just the booze talking? Are you prepared to flex either way in true trading fashion, or are you firmly convinced that only one direction can be in the cards?
Looking forward to your replies: justice@taipandaily.com.
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