Monday, February 23, 2009

A plan for a plan for a plan... or still waiting

I feel a little bit like I am watching two doctors debating the merits of two different surgical techniques while the patient continues to slip away unattended on the operating table.

(1) Is this a new plot on Gray's Anatomy? (2)Is it a farcical episode of Scrubs? Or, (3) is it a parody of the administration's ongoing approach to its financial sector problems?

Try (3).

While the Monday meltdown in the stock market did not have the financial sector as its epicenter, it was financial-related at its core. Bank shares ended last week so weak -especially - Citigroup, many rumors swirled about some bailout or support package being arranged for Citi and perhaps others over the weekend. But that weekend came and went. There was no help. There were some statements made to the effect that the administration does not want to nationalize banks. Still, some, outside of the Administration, continue to call for nationalization.

Returning to our doctor analogy, it's like the two bickering doctors agreeing not to try a third procedure, but still not being able to agree what to do. It's good that the Administration has eliminated one course of action but it needs to embrace a course of action. And it needs to embark upon that course of action as well. And it needs to do it NOW!

While Monday Feb 23rd, was more of a day of meltdown in material and industrial stocks, they are playing catch up. The financial sector is down by over 80% from its recent highs. The rest of the market has come under new selling pressure, too. And the financial sector was pressured as well on Monday. Large banks escaped the selling because the market interpreted the Administration's comments on nati0onalization to apply to large banks. Small and medium -sized banks may still be on the hook and at risk to the new stress tests that Treasury Secretary Geithner spoke of a week ago.

Having stocks at an 11 year low regardless of the percentage drop is a shocking development.



Many people like to draw the parallel with Japan. I don't think it applies very closely. Japan's lost decade came after an enormous stock market and property bubble in Japan. We had our stock bubble at the turn of the millennium - it is now 2009. We currently are unwinding a residential property bubble. Stocks are not coming off the bloated highs (as the Nikkei did) at the same time that whole property market burst. The US bubble is mainly residential while Japan's included everything. Moreover, in the US the residential price declines appear to have been mostly accomplished. In short, financial and property market conditions are different in the US. It's different for inflation, too, since Japan suffered deflation, while it is not clear that the US will. The US authorities have been much more aggressive and innovative than their Japanese counterparts were in trying to stave off recession/deflation. But like Japan the US authorities are having trouble deciding what to do with the banks.

That they have in common.