As 2009 comes to a close I had this funny thought: Pain and suffering are market neutral. The market goes up, the market goes down and the pain and suffering continue.
I think of this as I stare down the data of 2009: The “V-shaped” recovery is here (see graphics below) — at least for now — and the stock market is up 20%, surging 60% from the March lows. The investment banks that nearly brought down the global economy are racking up both record profits and record bonus pools.
With so much good news, why are so many so glum?
Oh, we’re not glum the way we were in November 2008 or even last March. The nation feels glum the way a lost child feels knocking around the house, unclear which way to go or what to do. Or glum, the way one feels after a death. Change is in the air, and it doesn’t feel the least bit comfortable. In theory, The Great Recession should usher in The Great Recovery. Instead, 2010 looks, at best, like The Great Blah.The wind in our collective sail has faltered because in retrospect the bailouts have shattered our notion of fairness. And this is a country that accepts differences in wealth — so long as things feel fair. You work hard and are smart and lucky? Congrats on your millions, even your billions.
The bailouts have smashed our sense of ourselves as a nation in charge. The vision was an illusion lead by Alan Greenspan and a host of enablers; Bill Clinton, Robert Rubin, Phil Gramm, Barney Frank and all the other lawmakers and economists who thought they could engineer society (100% home ownership!) and the economy (low rates forever; no failures) without any negative consequences. Greenspan and his denizens appeared to have believed that they were Captain Chesley Sullenberger at the helm of an Airbus A320, capable of a soft landing no matter where. But what the ideologues in Washington and New York failed to realize is that even a soft landing is far from painless. Sullenberger saved the passengers but the aircraft was lost; now the bureaucrats saved the aircraft but crippled the passengers.
We look back, and still wonder: How could it have happened — not just the greatest bubble in economic history but the response? And the survivors! Key players who were responsible for many of the threads leading to the great market crack-up are flourishing. You won’t find them on the unemployment line. White House economic advisor Larry Summers, Treasury Secretary Tim Geithner, OCC chief John Dugan (recently profiled in an amazing piece in The Nation), Congressman Barney Frank, and NY attorney general Andrew Cuomo (former HUD give-’em-all-loans secretary). You have to wonder how the geniuses behind the Fannie Mae and Freddie Mac implosion performed so scandalously while one private firm (Enterprise Community Investment) devoted to low-income housing has fared so brilliantly, even during the darkest day of the economic breakdown.
And then there were the bailouts, an astonishingly slap-dash, even naive affair by Wall Street standards that left taxpayers with just the bill and not much more. We saved GM while castigating the world for contributing to climate warming. How about putting all those billions into building public transportation? Why subsidize something that symbolizes our dependence on oil? No vision whatsoever.
What is left behind is gnawing resentment between the haves and have-nots. And a series of tiresome articles about bonuses and benefits — a distraction in what some have tallied to be a $17 trillion bailout. Isn’t the whole point of capitalism that people can get rich? Isn’t that supposed to be an incentive? I don’t care if the bankers make more money than Midas himself. This is America. Anyone can do anything. A poor kid can become a billionaire — but his investors get rich with him. A man raised by his grandmother can become President, and we are all the richer.
But it’s New Year’s eve, so I’ll hit the pause button on this rant to consider the V-shaped recovery, which everyone had been longing for. In this economic scenario, the economy comes roaring back from its lows. In an L-shaped recovery, which everyone feared, we just hobble along the bottom. In 2010, I expect the V-shape could continue, but we, as a nation, will feel like we are in an L-shaped scenario because the recovery will help relatively few people and because of the state of our national debt.
So here’s a roundup of a few data points that support the V-shaped recovery outlook:
First, the “activity index” from the Chicago Fed:
You see the “V” shape on the far right in the graphic? Business fell off a cliff and while still not in an expansionary mode is clawing it’s way back to Square One. In fact, according to the Chicago Federal explainer, this graph shows a classic pattern of recovery after a recession.
Next, existing home sales (via Calculated Risk):
The extension of the first-time buyer tax credit has given an extra boost to November home sales, but the ‘V’-shape is unavoidably visible.
Next, the Philadelphia Fed’s Coincident indicator (again, via Calculated Risk):
Here’s the coup de grace, gross domestic product, a measure of how we’re doing coast-to-coast — even including California!
And just for those of you who would like to see an upside down V that signals good things — the declining number of jobless claims:
This brings me back to the start of my post: pain and suffering are market neutral. This, of course, has always been true. It just feels so much more poignant now. What strikes me as particularly humorous this go-round is that in the ’00s, hedge fund managers sold “market neutral” strategies as a sure-fire method to avoid losing money in down or up markets. AIG Financial Products was so hedged that its fearless leader promised winnings no matter what. (Estimated minimum loss to taxpayers: $30 billion — remember the biggest bailout until 2008 cost taxpayers $1 billion with the demise of Continental Illinois in 1984.) The emails in the recent Washington Post story on the demise of AIG are amazing to read. One trader, puzzled by the implosion, complains that he isn’t getting his allotted high-fives.) Market neutral was one of the biggest flops on Wall Street, along with credit default swaps and securitized mortgages, and the triple-A seal of approval from the credit rating agencies.
And now as we look into 2010, investors ask whether the market rally is a true harbinger of The Great Recovery. Who better to ask than the famous hedge fund manager of the month? According to the Wall Street Journal, David Tepper foresaw it all — the “V” in recovery and the brightness of our future. This fearless manager had the backbone to invest in America, the tree that grows no matter what. David Tepper, hedge fund manager and brilliant strategist stood tall and bet that we wouldn’t lapse into a recession, as a result, raking in a cool $7 billion profit for his Appaloosa Fund.
But is that really what Tepper’s trading bets signal? A real belief in the hardiness of our oil-dependent, smoke-belching, Zombie-lovin’ economy? Or maybe he was just placing a bet on the spinelessness of the feds and their willingness to print and print and print more dinares for supplicant financial Amazons. I’ll grant Tepper has the cajones to follow his instincts. He’s one hell of a trader. But his instincts didn’t exactly point to a noble vision of American know-how leading to great economic success. No, his vision wouldn’t result in a wild rendition of “Ode to Joy.” In his own words, Tepper says he was betting that the feds wouldn’t let the banks go under:
On Feb. 10 of this year, Mr. Tepper read that the Treasury Department was introducing the so-called Financial Stability Plan. It included a commitment by the government to inject capital into banks by buying their preferred stock, or shares that carry less chance of reward but also less risk than common stock.
At the time, investors worried that the government ultimately would have to nationalize big banks. U.S. officials said they had no intention of such a move, which could wipe out common shareholders, but investors were dubious.
The news from the Treasury Department struck Mr. Tepper as proof that the government would stand behind the banks. He directed his traders to begin buying bank stock and debt.
For the past decade, the feds have basically pursued a policy that enabled moral hazard. Why would Tepper believe that anything different would happen this time round?
So even as 2009 was shaping up to cap the worst decade for stock investors in nearly 200 years, Tepper’s Appaloosa Management is up 120%, after fees. On Twitter the traders soundly chastised all the lumpen-proletariat who missed out on one of the greatest market rallies. One commented that they held on to their bearish views “the way toddlers clutch blanky.”
But one trader said to me that playing the rally doesn’t signal a long-term bullish Indeed, the Treasury curve, typically interpreted as the Grand Seer of the macroeconomy is sending mixed signals. The difference in yield between the two-year and 10-year note has now widened to 2.81 percentage points. The last time the yield curve looked this steep was 1992 or 2003, according to the Journal. And what do you know — that was just when we were emerging from recessions. It could be yet another harbinger of recovery. But this time round some are wondering whether the yield curve is signaling something else. It may be a measure of how much investors fear the mounting costs of the bailouts and the ambitious Obama agenda. This year alone, Treasury issued a record $2.1 trillion in new debt. The yield curve may be saying: Next year, the Fed won’t be buying debt to help repair the economy; it may actually be selling securities, depressing bond prices and raising interest rates. Yikes.
At the moment, our leaders are relying on a sea of liquidity, which is not unreasonable so long as it flows to where it’s truly needed; so long as it doesn’t offend our sense of fairness. At the moment, bank lending is abysmal and non-financial companies are sitting on a hoard of cash. With some luck and skill, we can hand back the economy to entrepreneurs who create something more than financial instruments. That is where the future lies.
I wish you all a prosperous and healthy 2010.