The deeper problem is that losses from credit derivatives and subprime-mortgage defaults are only one problem for banks, essentially the first of two bear markets. The other is lower earnings, which most investors have yet to come to grips with. The real danger is that attempts by government and industry rescue squads to interfere with market forces with well-intentioned triage missions will serve only to stretch out banks' pain -- much as was seen in Japan during its two-decade recession.
Sugar pillsCompanies in Japan saved face but were essentially walking zombies that lacked the reserves or credibility to lend their way back to the profitability they'd enjoyed during the years of the country's real-estate bubble. Policymakers in the U.S. know that but so far seem powerless in an election year to resist the temptation to appear to be doing something.
Perhaps they should learn a cross-industry lesson from a British study released this week showing that expensive antidepressants are not much more effective than placebos. The report suggested that manic-depressive patients were just as likely to benefit from a brisk walk in the woods as from popping $100 pills.
Surely the same advice could be given to the stimulant pushers in Washington, for no matter how many expensive injections of tax rebates or monetary back rubs they wish to apply to solve banks' anxiety disorders, the best remedy may be just a rather lengthy stroll through time to let kinks in the system straighten out and allow credibility and healthy levels of greed to flow back naturally.
Too pessimistic? Maybe, but don't think I'm blind to the positives in the environment. The M2 measure of money flow has surged by $140 billion due to the Fed easing already; tax refunds have totaled $80 billion so far and will be augmented by $170 billion in rebates soon; technology companies' earnings are surpassing expectations; construction contracts for power infrastructure are rising;, and are all on a roll; retail sales in January and February were largely better than expected; unemployment claims are not out of control; a less antagonistic new administration in Cuba could add a touch of growth to tourism; drug regulators are lightening up on biotech companies; Kansas is close to clearing the way for two massive new coal plants; Democratic and GOP campaigners have already spent $260 million in ads to boost broadcasters; inventories are relatively lean; wage growth is steady; a pool of investable funds overseas is just itching to buy big stuff in the United States and Europe; and the federal funds rate will fall to 2.5% in the next month.
Yet a credit contraction is likely to trump all of the positives. So enjoy the rally for a few more weeks, but be prepared for a new leg down by the time second-quarter redemption requests hit hedge funds and banks announce their next round of write-downs.
Fine printTo learn more about Japan's post-credit-bubble recession, read this paper at the Ludwig von Mises Institute's Web site. . . . To learn more about that British antidepressant study, visit this MSNBC story or this one at a Canadian health news site. . . .
At the start of the year, I recommended agriculture as potentially the best sector for this year in this column. Skyrocketing wheat and corn prices have certainly lifted the sector and key stocks and exchange-traded funds. I will explore that further next week.
At the time of publication, Jon Markman did not own or control shares of any companies mentioned in this column.