Thursday, January 15, 2009

Why the financial markets aren't turning around anytime soon (like, all of 2009)

Everybody I hear who says he's "bullish" on the market for 2009 talks about interest rates, the Fed's loosening of the money supply, or President Obama's stimulus plan. One of these -- or all of these, together -- can't help but lead markets and the economy upward. Or so this line of thinking goes.

It's not bad reasoning, in the sense that at least the argument has reasons.

But it's wrong.

These bulls give too much explanatory power to economic 'fundamentals.' The main story right now is confidence. That is, psychology, not systemic mechanisms. Basically, who thinks if they buy a house with those low interest rates the value of the house will go up? Who thinks it is safe to lend money? Who thinks their job is safe? Who thinks the future is bright?

No matter what the fundamentals 'say,' individuals look at their environment and see gloom. Right or wrong, that is the story. Financial markets and the US economy will stay down so long as this contunues to be true.

You want an economic fundamental? Look at consumer confidence, and the flows of credit.

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