07.30.10

Last week, I wrote a column in Time about the unfortunate tendency of investors, pundits, economists et al to view stock markets as barometers for the economy and economic data as indicators of the markets. This tendency is pronounced in the media in general and the financial media above all, which looks daily for a story about why markets move up or down.

Almost everyday, some sort of economic statistic is released by government, ours or some government somewhere. Whether that is GDP data (which was released today and showed a not-too-impressive 2.4% growth for the second quarter) or inflation or durable goods or consumer confidence (not a government statistics but one that gets a lot of attention), each day brings some economic news. That permits a daily narrative that links the release of the statistic to the movement of the markets.

As if to prove that point, an article appeared in the New York Times on July 28, with the following headline” “Shares Fall as Data Says The Economy is Weakening.” The piece actually came from Bloomberg news, but no matter. It was yet another example of the false correlation between markets and economies.

Stocks represent ownership stakes - tiny ones - of companies, and companies increasingly exist in a universe only marginally related to any one national economy. They can, in fact, avoid many of the things that drag down national economies - labor, health care, taxes, old people, young people. And they can take advantage of things like cheap and plentiful global capital, easy mobility of goods, and increasingly helpful information technology systems that allow them to increase efficiency and productivity. They exist in their own transnational economic system, and the value of their stocks has little to do with whether the U.S. economy or any economy is ailing.

Of course, investors still believe in that correlation, and so trade the economic news, which in the short term means that stocks can track the economic data for that reason. But that doesn’t mean that a company such as Microsoft or Caterpillar is nearly as tethered to or dependent on the health of the economy in order to make colossal profits. And the sooner we collectively recognize the degree to which corporate land has broken free of national economies, the more we will be able to have the right discussion about national economic policy and about how and where to invest.

05.06.10

The Greek debt crisis finally spilled over in full force to U.S. markets, aided and abetted by extreme statements emanating from such esteemed and prominent voices as Muhammed El-Erian of the large bond investor Pimco, who warned that Greece could be just the beginning of sovereign debt catastrophes. In the space of minutes, the major U.S. indices plunged more than 10%, fueled by the same programmatic electronic trades that were part of the battering in late 2008 into 2009. And then in the space of 15 minutes, they recovered, without – it’s fair to say – much human decision-making during that interval (and if an individual even tried trading during those 30 minutes, they would have found it difficult or impossible, as web sites such as schwab.com were completely overwhelmed with traffic).

The fact that the Greek restructuring of about $140 billion was less than the single bail-out of financial firm AIG in the fall of 2008 seems not to matter; nor does the fact that while AIG and a half dozen other “too big to fail” financial institutions had trillions in derivatives outstanding, the country of Greece does not. Its history is rich, but its economy is not. Yet that isn’t deterring people from panicking, nor preventing the hobgoblins from feasting on collective fears.

Markets have to be respected – it doesn’t matter much if you’re “right” when the streets are filled with panic and volatility. But that doesn’t mean we have to join the party and play in the wagon’s band. The problems of Europe are real, and political. Relatively cash-rich Germans resent helping Greece, and Greece resents being in the position of requiring help. The entire European Union, meanwhile, continues to confront the challenges of its unwieldy currency and strong social safety nets, but I doubt the current crisis will lead to much less partying on Mykonos this summer. And in northern and Eastern Europe, newer members  like Latvia are embracing levels of austerity that the Greeks aren’t even contemplating – without riots, because the fear of Russia is greater than the perils of restructuring their economy. And while debt levels in Spain and Portugal alarm, their issue for now remains the myopic and knee-jerk reflexes of ratings agencies such as Moody’s and S&P that everyone knows are broken but no one really wants to fix. Without them to blame, people would have to start taking responsibility for their own risks and do their own due diligence.

So let’s respect the panic for the harm it can do, but not grace it with a substance that it lacks. We’ve been down that path recently, and it’s not one we’d want to walk down again soon. The world is full of problems, always has been, likely always will be. Greece is currently one of them, but there will still be lots of people basking in the Mediterranean sun reading about it on their $1000 iPads in a few weeks time. That is no less a reality, and it says something quite different about the world we’re in

03.12.10

Last week, I published an essay in Time http://www.time.com/time/magazine/article/0,9171,1969745,00.html magazine about debt, arguing that our current preoccupation with the federal deficit and with debt in general is a dangerous distraction from the real issues: namely our inability to invest and spend wisely to create the economy of the future. The problem isn’t debt per se - after all, the U.S. government took on much more debt during and after World War II, and few would argue that was bad policy or led to disaster. The problem is that we aren’t spending our debt productively and are instead frittering it away on consumption, tax rebates, military budgets to pay for Cold War-era weapons systems, pork projects, or other forms of spending that will not yield returns in the future. Read more…

10.16.09

The economic relationship between China and the United States is the defining issue of our day. While debates over health care are vital to American society, and while challenges ranging from Iran to Afghanistan to North Korea are real, nothing will determine the arc of the coming decades - or will shape domestic life and prosperity in the United States - more than the emergence of China as a global economic superpower unrivalled except by America. Read more…

08.13.09

With Wall Street - and the Federal Reserve - in a headlong rush to declare the recession over, the economic data has indicated that the simple binary recession-no recession framework obscures more than it reveals. Yes, defined purely in terms of Gross Domestic Product (GDP), the recession looks to be winding down, with strong indications that GDP is about to turn positive after a long and painful swoon. Read more…

07.16.09

With a slew of major companies reporting earnings so far, it’s clear that expectations were severely skewed to the negative. Once again, Wall Street analysts overshot - this time to the downside. The substantial margin expansion reported by Intel; the higher-than-anticipated profitability of IBM; and the blow-out quarters of Goldman Sachs and JP Morgan all stand in contrast to sentiment just a few weeks ago, which was grim and getting grimmer. So what happened? Read more…