The markets have spoken. Monday's global market sell off is telling us that Henry Paulson, U.S. Treasury Secretary, might well go down in history as another of Bush"s "Confidence Men." U.S. markets opened sharply lower on Tuesday suggesting that the investing world did not believe what the economic front man to the Bush administration just told us. Based on the magnitude of the sell-off, they might well be saying that the administration is completely out to lunch.
Remember foreign policy front man Colin Powell, and his proclamations that Iraq certainly did have weapons of mass destruction? Well, Paulson may end up the next over accomplished leader, turned administrative mouth-piece, who was sold a bill of goods. After talking to "knowledgeable people in all parts of the economy" Mr. Paulson, speaking for the president, concluded that while "our economy is growing slower than expected...I am confident in our long-term economic strength." I have to wonder who these knowledgeable people are, and were they the same people Colin Powell was talking to?
If Paulson read the latest Goldman Sachs economic report he would know that the U.S. is "either in recession or headed into one shortly"(GS:US economics Analyst - Jan 11). You can't blame the guy for wanting to appear calm and collected given the ridiculously alarming news that continues to hit us daily, but his suggestion that some short-term fixes will cure what ails us is equally alarming. His advice to spend our way out of this temporary problem may well prove a ridiculous suggestion for an economy diseased from extreme over-consumption in part caused by a lack of appropriate financial oversight as well as overly stimulating monetary policy. Who ultimately will claim responsibility for America's addiction to buying stuff, made possible by cheap money and corner-store credit dealers? Though I am not quick to blame any one party, the first step in our collective healing process, as any AA member will tell you, is to admit you have a problem.
Perhaps Mr. Paulson has found his higher power, the second step, in the very smart and insightful Abbey Joseph Cohen, Goldman's Market Strategist. She may have convinced him that a "recession will likely be avoided, due to strength in exports and capital spending by corporations and governments, and thanks to a vigilant and flexible Federal Reserve." (GS: Issues and Outlooks, Dec.07) Abbey calls for a year-end S & P of 1675 (Barrons, Jan 14th 2008), but there is a lot of time between now and year end. As one of many market experts interviewed for the annual Barron's roundtable, her bullish outlook was certainly in the minority. She, too, however, is not without concern about the strength of the U.S. labor market as well as inflation.
Following Paulson's Friday remarks a short breath of faith hit the markets. The S& P hit a high of 1350, from an opening at 1333. A close at 1325 however, was not in my books, a good sign. As an ex-Goldman Sachs trader I learned from the best, and a negative close after what should have been conceived as 'good news' is a very bad sign indeed. Market prices reflect the collective opinions of the people who are buying and selling. If by some small chance Tuesday ends up a good day for the markets, it is in most part because the investing world chose to believe that the problems are now under appropriate adult supervision. If the markets perform poorly on Tuesday, as they now seem likely to, they are telling us the opposite. Now we might only guess what might have happened if the U.S. markets were not closed for Martin Luther King Day. While Americans were waiting the extra day to vote on Mr. Paulson's performance, the rest of world took a stand. Tomorrow we will have our chance. Entering in your buy or sell order is effectively casting your vote. Either things are not so bad, so hold on to your stocks and just keep on spending, or, Houston, we have a problem.
I had the pleasure of working for Secretary Paulson at Goldman Sachs and find him a very thoughtful and honest man. I hear he is not a drinking man, and thus may be not at all familiar with The Twelve Steps of Alcoholics Anonymous. I would encourage him, and the rest of the current administration, to take a look at them for inspiration on how to handle what deeply ails America. I recommend Step 4 in particular: "Make a searching and fearless moral inventory." An honest inventory of our economy is much needed. Let's hope the administration can transcend confidence games and be more fearless, and moral, in its resolve.