The incessant hunt for silver linings has turned Wall Street analysts and Fed officials into economic historians, with dubious credentials. “We have to go back to the 1957-58 recession to see a larger percentage drop in employment,” San Francisco Fed advisor Sylvain Leduc stated in a “FedViews” posting Wednesday. Mr. Leduc’s colleagues in New York have been pointing out, with typical Hegelian flourish, that as bad as things are today, they are not as bad as 1982. And, of course, Fed Chairman Ben Bernanke, drawing on his study of the Great Depression, has concluded that rather than applying an all-encompassing strategy to eliminate systemic risks within the financial system today, the challenge is to keep the flawed system itself alive, long enough.
In actual fact, all the historical parallels fail to account for the fundamental, and politically unpleasant, fact that the post-Second World War growth in the American economy was largely a consequence of America’s global financial and military domination which, in turn, enabled American capital to access cheap raw materials, to find new consumer markets and to create lucrative investment windows. Today, the foreign ingredients boosting the domestic economy have been virtually eliminated. A timely example is Latin America where, after decades of pro-US dictatorships, the proponents of the Bolivarian Revolution are now taking measures, with each passing day, to completely block American capital’s ability to both survive and prosper in a socialist environment.
Chairman Bernanke has linked systemic risks to leverage, and has assumed that leverage will, to a significant extent, simply disappear, with a turnaround in asset values. That is precisely the point, i.e. an automatic reduction in leverage, where historical parallels simply do not apply to the current situation. In brief, we are not in the midst of “a cyclical” crisis; Hegel’s prism of evolution through contradiction-and-negation is no longer valid.
What we are confronting is an entirely new dynamic in the international capital accumulation process which began with the formalization of colonialism by European powers at the 1885 Berlin Conference (the “Scramble for Africa”) and which shifted sharply in favour of the United States after the Second World War. “That process of capital accumulation was clearly secured by American military and political influence,” a researcher at the EU’s Brussels headquarters stated on the sidelines of the Davos Economic Forum recently. “That influence was severely diluted by the 1979 Iranian Revolution and, since then, 100-odd non-industrialized, developing nations have been gradually shaping their economics and politics on an independent or semi-independent basis. The end of the Cold War has worked against the US economy, albeit indirectly."
The Obama Stimulus Plan may well create or save 3.5 million jobs. And segments within the American corporate spectrum may well benefit from orders flowing from infrastructure and green projects. As a result, certain sectors within the S&P500 will record appreciable gains in forthcoming months, in view of improved earnings through 2010. But will the gains be sustainable? Will the sector-specific gains be large enough to carry the S&P500's weaker constituents? Will stimulus spending establish the foundations for a decisive turnaround in the domestic economy? Remember, that many of the jobs created will be temporary in nature.
In many respects, the quality of the turnaround will be conditioned by the state of affairs in the non-industrialized world. If, by early 2010, the emerging markets do not show a credible capacity to reinvigorate consumer demand, investors will be asking themselves the question which should actually be addressed today: What exactly are we stimulating?
This is the type of global situation which ideologues like Marx and Lenin predicted many, many decades ago. Unfortunately for those on the Left side of the political equation, the crisis is unlikely to lead to any revolution of workers and peasants. On the contrary, this crisis is resulting in a series of repressive governments (shades of pre-war Europe!) whose defence spending will enable them to keep the poor in check, and to continue trial-and-error exercises and protectionism inside their economies.
From a trading perspective, one must remain short the market indices (EEM, QQQQ, SPY). Unless one is exceptionally proficient in stock picking, there is no money whatsoever to be made on long positions. Stimulus spending, and accompanying public-relations barrages, will certainly cause rallies driven by the many advocates of the supposed science of value investing. Each rally should be viewed as a short-selling opportunity. Since the Obama Administration is unwilling to recognize the pressing need to attend to the rationalization of the domestic economy by removing leverage and overvaluations at short notice, traders can easily rely on hard economic data to do the needful, in the medium term, perhaps by the second half of 2009.
Disclosure: Short EEM, QQQQ, SPY.