Market Talk

There were two things I saw last week that put the fear of God in me. Both came Wednesday. One seems to be improving; the other remains a wild card, and that’s why I bring it up.

That was the first time I saw close-up pictures of the mangled Fukushima Daiichi nuclear plant. The walls that contain two of the reactors are completely gone. The upper third is missing from another. Seeing those pictures, it was pretty obvious to me that a total meltdown was a very real possibility. Those pictures were worth more than 1,000 words, and every word was absolutely shocking.

The Fukushima 50 have had some success in stabilizing the plant as of Sunday, and I fervently pray they are ultimately successful. God bless their courage. Were that others were so dedicated.

The second thing caught my attention Wednesday was the yen’s frenzied spike just after 5 p.m. New York time. The yen, which had been strengthening since last Friday’s earthquake, suddenly broke through all resistance and spiked higher. Lightning fast. Straight up. It was a black-swan kind of thing. Shorts were forced to sell, and that only contributed to the rise. It was chaotic.

“I can almost guarantee you that a few (hedge) funds out there were hurt very, very badly,” Dennis Gartman, who edits and publishes The Gartman Letter, said via email.  “No one ever escapes that sort of action entirely.”

I’ve had the feeling since last Friday that the ramifications of Japan’s nightmare are going to be larger than people initially suspected, and they are going to end up in places where people don’t expect, and in a world as tightly connected as the one in which we live, that increases the odds that one haywire event will have a cascading and destructive effect. Something like the yen’s sudden jerk has the potential to spark a global unwinding. It’s a scary thing to contemplate.

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The biggest story to come out of the so-called Great Recession, certainly not the most written or talked about by a long shot, but in my mind the most important, is the cracking of the middle class.

This is something that needs to be recognized for what it is. Certainly politicians don’t want to face up to it. Wall Street doesn’t want to. Corporate American doesn’t want to. Even most of the press doesn’t want to, which is curious especially when you consider that journalists aren’t particularly well paid, and the majority are smack-dab in that squeezed middle class.

This is what I was getting at in December when I wrote about the debate over whether $250,000 be considered rich. If you can honestly debate that, what does it say about the people who are nowhere near that level?

There are more of them than you might think. I’m looking at some demographics data about New York City, from 2007. Granted that’s before the recession started, but I bet the percentages haven’t changed much, if anything, they’re worse. In the city in 2007, 5.5% of the households made more than $200,000 in income and benefits.

But what’s truly interesting is this: 68.5% of the households in New York City made less than $75,000 in wages and benefits. Going further, 51.8% of the households made less than $50,000. If you live in or around the city, you can appreciate how hard it’s got to be to raise a family on $75,000 or less.

The dollar amounts might be different across the nation, but I bet the percentages aren’t very different, and it speaks to the serious deterioration in wages and the value of the dollar over the past generation.

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I don’t know if 2011 will be the year that It All Falls Apart. The Panic of 2008 has passed, and has clearly passed from Wall Street’s memory, which seems hell-bent on getting Ma and Pa Kettle to open up the purse strings, frayed and torn as they are, and start buying stocks again.

But for many, it’s hard to imagine the Panic of ’08 didn’t leave a lasting impression, and maybe even reminded them of the impression made by the stock crash of ’00. If the Panic itself wasn’t enough, there is that one little data point that keeps rearing its head, you know the one about 10% unemployment, which promises to keep a cap on the recovery, much as the bulls try to explain it away.

Then, there’s, well, there’s Europe, the United States, China and Japan. You know, the world’s four largest economies (if you include Europe as a group.) All have acute problems that are currently being held together with the policy equivalent of spit and baling wire. When or if they blow is anybody’s guess, but they are out there, and they are big, honking, nasty problems.

Ambrose Evans-Pritchard over at the Telegraph has as good a summation of the problems as any.

Better get ready, Mama, there's a storm coming.

This is what can happen when you think jawboning can replace concrete policy. While European leaders have talked, and talked, and talked, without actually doing much of anything about the escalating Greek crisis, the rest of the world has watched, and waited, and worried, and wondered if this was all going to be settled and contained before it spread to the rest of Europe, and God knows where else after that.

Contagion 3, Jawboning 0.

“It’s not a question of the danger of contagion; contagion has already happened,” Organization for Economic Cooperation and Development Secretary General Angel Gurria said in an interview with Bloomberg television in Berlin today. “This is like Ebola. When you realize you have it you have to cut your leg off in order to survive.”

The ratings agency S&P threw a Molotov cocktail into the serene marketplace yesterday, downgrading both Greece and Portugal. Not content with bolstering their battered reputation with those moves, S&P tossed another grenade today, downgrading Spain. The only “PIIGS” members left unaffected are Italy and Ireland. But they may not remain so.

More downgrades are coming, says BBH’s Win Thin, as ratings agencies are “on the warpath and unlikely to relent any time soon.”

So far, over here the reaction has been almost nonexistent. Stocks have been volatile, and fell on the news of the Spanish downgrade, but are back to their morning highs. Of course, U.S. investors are waiting to hear from the Fed at 2:15 p.m. I wonder what’ll happen after that, especially with the dollar up sharply as the euro sells off. The euro is threatening the $1.31 level; $1.32 was seen as a line in the sand.

“We have gone past the point of no return,” said Jacques Cailloux, chief Europe economist at the Royal Bank of Scotland, as reported by Ambrose Evans-Pritchard in the Telegraph.“There is a complete loss of confidence. The bond markets are in disintegration and it is getting worse every day.” And that was before the Spanish downgrade.

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Where's a leader when you need one?

I know I mentioned this movie before, but I’ve been catching bits and pieces of “Thirteen Days” a lot on basic cable lately, and to the extent that the movie’s an accurate depiction, I’ve been gaining a lot of respect for John Kennedy. I always thought he was just this good-looking, charismatic guy with a penchant for sneaking girls into the White House through underground caves. But apparently, he was a real, actual, in the flesh leader, something sorely missing from the world stage these days.

During the Cuban Missile Crisis, as the very real threat of total nuclear war loomed, Kennedy was dead-set about two points: his team of advisers had to come to a consensus opinion on a course of action, and they had to come to it within, well, 13 days. Now, I know it’s just a movie, but it’s not just a movie the way, say, “Attack of The Clones” is just a movie (and a bad one at that.)

The events depicted in “Thirteen Days ” did actually happen. Kennedy’s, dare I even say it, leadership drove the nation to action, and his wisdom kept the nation from doing something stupid that very easily could have led to World War III. An important point, that last one. I bring this up as a contrast with what’s going on over in Europe, where there is not a shred of leadership from the various capitals about how to handle the Greek situation. Or wisdom, for that matter.

What should have happened a long time ago was that somebody among the EU leadership should have demanded a consensus from the group, money or no money, by a set date (we’ll get to the no-bailouts issue.) Instead, we get month after month of jawboning, of Europeans making vague pledges of support, of Greeks insisting they’re not asking for money, Germans insisting they won’t give them money, everybody knowing they desperately need money, the IMF saying it’s ready to give them money, the Europeans saying they don’t want the IMF to give the Greeks money, the Greeks saying they don’t want money, the Europeans insisting they will support the Greeks, the bond market saying show us the money, and the Germans once again saying they won’t give the Greeks the money.

Where’s a leader when you need one?

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First off, on a programming note, we’ve incorporated a Twitter stream into the front page, and we’ve been playing around with different widgets that provide that service, so you may see some movement there in the upper right hand corner. We also, in order to do this, had to start a Twitter account for Market Talk, so if you’re a twitterer, or whatever they call it, you may want to give that a whirl as well.

Now, then, onto more interesting things. Recently, we relayed comments from the Telegraph’s Ambrose Evans-Pritchard about the contraction in money supply, and what it could mean for the global economy. The pertinent paragraph:

The contraction of M3 money in the US and Europe over the last six months will slowly puncture economic recovery as 2010 unfolds, with the time-honoured lag of a year or so. Ben Bernanke will be caught off guard, just as he was in mid-2008 when the Fed drove straight through a red warning light with talk of imminent rate rises – the final error that triggered the implosion of Lehman, AIG, and the Western banking system.

Forget for a second that, officially, the M3 measure in the US doesn’t exist any more (although quite the conspiracy theory was left behind.) John Williams over at Shadow Government Statistics still tracks it, and has it declining. Another group that tracks it is Capital Economics, and the firm says it declined by 1.4% last year, “matching the magnitude of the only previous decline back in 1993.”

It’s wonkish stuff, but it does ground out in the real world. When people say the Fed’s printing money, this is what they’re talking about. The idea behind it is if the central bank buys, say, a trillion and a half worth of assets from the banks, the banks will use the profits to make loans, and people will use the lent money to buy things. The first part happened, but the rest of it hasn’t quite worked out like that.

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Happy days are here again...

The past few days, I’ve had this feeling, this feeling that I’ve been here before. Stocks rallied on Monday, and everybody and their mother was trotting out the old saw about the predictive power of the year’s first trading session (even though it actually has little to no predictive power, as Marketwatch’s Mark Hulbert explained.)

Wells Fargo’s Jim Paulsen, about as bullish a guy as there is, was on CNBC this morning, saying the market’s recovery is only in its early stages.

Listening to Bloomberg radio on the way to the bus this morning, I heard Benchmark’s Clayton Moran say unemployment had peaked, corporations would be plowing profits back into operations, and GDP was going to be stronger than anybody expects.

Amid all this optimism, you know what it feels like? It feels like 2007. All that confidence was misplaced then, and I worry that it is misplaced now as well.

That whole year felt the same way to me, really. The market kept rising, even as it was obvious that the housing market was in a massive bubble (and anybody who says otherwise is lying or too dumb to know the difference) that was on the verge of popping. Stocks rose — to record highs — right into October, as the equities market with all its great predictive powers completely and blissfully missed the biggest economic bust of our lifetimes.

There was a point in late 2008, maybe early 2009, I forget the exact day, when I called a source, a strategist on the Street who shall remain nameless. The depression in his voice came across so clearly, I asked him what was wrong. “This, everything,” he muttered, “the market.” That was about as forlorn as I can recall anybody being, but I’m still not sure that the market ever really bottomed in sentiment. Said source quickly rebounded, and is about as ebullient as ever. Seems like everybody’s that way.

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Where am I again?

So the recovery, apparently, is going pretty swimmingly if you’re a G20 minister. It’s not going quite so well if you’re just an underpaid (but at least employed) researcher at the Chicago Fed. And it’s positively going to hell in a handbasket if you’re a well-known, but probably still underpaid, journalist at a British paper.

It depends upon your specific vantage point. But no matter where that is, we’re all following the same map. Back in July, I wrote an Ahead of the Tape column for the Journal, looking at the markers the NBER, the National Bureau of Economic Research, uses to mark recessions and expansions. At the time, I said none of them could safely be said to show definite signs of recovery (and I’m quite sure the bulls were laughing, if they even read that far.)

Let’s see where we are today.

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