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Mr. Market Makes His Displeasure Known, and Wall Street Says it Needs Its Pony

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Now even though, as Ben Walsh contends, market moves are often just noise, a downshift of over 2% in the S&P on the day after a Presidential election is being ascribed meaning by market touts, and therefore, by golly, it does mean something. But there is an amusing gap between the breathless headlines about market/CEO unhappiness with the Obama win, and fears of No Grand Bargain Great Betrayal, versus the responses of old market hands.

A lot of the reaction looks like “buy on rumor, sell on news.” The stock market has looked toppy for a while; it wouldn’t have been surprising if it had fallen on a Romney win too. Jesse points out:

I said some time ago that if Obama was re-elected the equity markets would sell off.

That was almost a no brainer, if one looks at the historical market action after a win by an incumbent. But more importantly, the implications for tax selling this year with the reasonable expectations of higher taxes next year.

Bloomberg also picks up the notion that some of the selling is Obama-related tax avoidance.

Oh, but notice we’ve gotten this far….and you usually have to get at least this far into market-relatated commentary before you find out (if you find out) that stock futures rose overnight when the Obama win was official, and fell in the European AM on bad news out of Greece?

But if you read the Usual Suspects, the market indigestion is being used most often to scream for the necessity of a Grand Bargain Great Betrayal. Now in fact, it was pretty much a given that we’d have a big budget pigfight over the fiscal cliff. So what exactly changed as of today? It appears just that we were past the distractions of Sandy and the election, but I thought market professionals were supposed to be capable of looking beyond the end of their nose.

And in case anyone missed getting the memo, Obama was planning on delivering his Great Betrayal in the lame duck session. Now, amusingly, Romney was probably willing to let a more sizable fiscal deficit continue than Obama is (the Republicans are keener about preserving their tax bennies and gutting Social Security). So from that vantage point, the market reaction is correct, but for reasons at odds with the prevailing narrative: Obama is more committed to cutting the deficit than Romney was, which will deliver less of a hit to growth, which is better for stocks. Remember, Obama kept pointing out how Romney’s deficit cutting plans didn’t begin to add up, and that was likely not due to non-disclosure of “tah dah” items, it was probably the plan.

The headlines are broadcasting Wall Street’s wish list even more loudly than usual. Some examples:

Europe’s Woes and Worries Over U.S. Plans Rattle Markets New York Times

Wall Street sinks after election as “fiscal cliff” eyed Reuters

Wall Street Slams On Brakes as Hazards Loom Wall Street Journal

The Financial Times points out that the Obama victory (and gain in Senate seats) has not changed the Congressional dynamic: Few signs of fiscal cliff concessions

This is all tame compared to the reactions of deficit hysterics, such as: MARC FABER: Obama Is A Disaster, The Stock Market Should Have Fallen 50%, And You Should Buy Yourself A Machine Gun Clusterstock

And the overnight reports keep up the drumbeat:

Asian Equities Slide, Yen Advances as U.S. Fiscal Cliff Looms Bloomberg

It’s telling that the most sensible comment comes not out of the US or the UK, but Australia. While their discussion of Obama isn’t quite right (the man gets a simply remarkable amount of positive and negative reactions), this section from a MacroBusiness post by Flashman is spot on about the markets’ dangerous obsessions:

As an equities analyst, I was taught to look at the cash flows and balance sheet of a company as well as its profit and loss statement. What I learnt also was that the companies that delivered the greatest amount of profit growth also had some of the worst balance sheets and some of the most unsustainable cash flow.

The world, if it were a company, would be Enron. Its various divisions have, in the past 100 years or so, delivered blistering rates of growth, but its business model is structurally unsound and there is a massive disconnect between the gains of its executives and the returns enjoyed by all shareholders. Its administration is opaque, its financial measurement is flawed, its environmental record is awful and many of its managers are corrupt, incompetent or both. Some don’t even show up for work. Most of all, however, the world is largely borrowing from its future to deliver returns to the present. And while there’s no small amount of true innovation and genius in the mix, most of this entity’s economic performance, its profit line if you will, has been at the expense of its balance sheet: the earth.

America is the biggest operating unit of this planet-company and its re-elected boss is not a bad guy; some would even say he’s the best we have. But rather than demand ever-increasing dividends from a clapped-out machine, the world’s investors – all of us – should be looking at the balance sheet and start thinking about the structural issues that warrant major repair work.

Our obsession with bottom-line growth – gross domestic product – is ultimately going to harm our investment, just as it did to share market investors leading up to the financial crisis. Our inability to comprehend that growth is a careful balance of land, labour, capital and innovation – not a right that can be delivered sustainably through expedient means – will eventually leave us unstuck. The market’s refusal to comprehend politics beyond the trading day is evidence of a system that’s deeply flawed.

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36 comments

  1. athena1

    Ok, regarding the me vs Klassy wars goes. I’ve found the comment I think demonstrates what’s up here:

    “Klassy! says:
    November 5, 2012 at 8:04 pm

    Why didn’t Obama cross the road?

    From your white and privileged vantage point I guess that road is pretty important, but when teenage girls are dying from back alley abortions after Romney is elected, pardon me if I don’t give a rat’s a** about that road.
    Reply ”

    That’s NOT someone really joking. And someone calling them-self Klassy said they were only joking when replying to me.

    Also, I R not troll.

        1. different clue

          Chris Rock is rich. Social Security and Medicare and Medicaide mean nothing to him. They mean something to me, though.

          Do they mean something to the non-rich majority of black people? Will they mobilize to save their Social Security and their Medicare and their Medicaide from the evil clutches of their beloved Great Black Hope? Will they even wake up to see the need?

    1. Yves Smith Post author

      Oh, that’s the nicest thing I’ve heard in a while :-)

      Seriously, there is an entire news channel devoted to happy talk: CNBC. So you can cheer yourself up fast if you really need to.

  2. Sleeper

    Wait a minute -

    If some 70% of market trades are high speed trades between computers how is it that the “market” is even affected by the election ? Or by any other blip ?

    1. jake chase

      One thing about the equity market people tend to forget: every time somebody sells, somebody else is buying. Chances are the people buying already own our feckless leader. Fiscal cliff, my ass!

  3. Thorstein

    The weirdest thing about last night’s Asian session was how heavy & intense the EurUsd buying became just 2 minutes BEFORE the news of Obama’s victory hit the tape.

    No doubt, the Eur, Aud, Gbp, Xau & Xag were well bid all night as the returns rolled in, presumably because an Obama victory signals “risk on.”

    Several hours later, I’m told, some news came out of Greece and it was “risk off” or a “flight to quality” and the USD rallied, metals fell, stocks fell, etc.

    Iirc Romney vowed that if elected he would not reappoint Bernanke. So Obama’s reelection presumably signals more QEs, more Bernanke/Krugman economic policies, more extend, pretend, and more attempts at doing what he thinks Doris Kearns Goodwin’s Abe Lincoln would do.

    1. lambert strether

      Well, if I were a gambling man, I would have placed my bet at one of these times. So to me, the tape seems slowM:

      10:38PM OH: “Senator Portman tried to pump up the crowd here in Columbus, but they were having none of it. It’s remarkably downbeat here: All eyes are glued to television screens and smart phones, and the aides and staffers aren’t saying anything. A few people are sitting glumly on the sofas, and the general mood is pretty tense” (NRO).

      10:32PM WI: Networks call WI for Obama (20% counted). So what happened with that recall thing, anyhow?

      10:29PM VA: “More than two-thirds of the vote has been reported in Virginia. At the moment, Mitt Romney leads President Obama by four percentage points, 51 percent to 47 percent. But keep an eye on the Washington suburbs: Fairfax County, Loudoun County and Prince William County, where only a tenth of the vote has been reported so far” (Nate Silver). Creative class heartland.

      10:25PM “The mood here at the @MittRomney party in Boston is grim to say the least – everyone standing around watching TV, glued to phones, no smiles” (FT tweet on site).

  4. Klassy!

    Athena1,
    Well, here I am reading about Mr. Market, not planning to comment– I limit myself to read only for certain posts, lacking the knowledge or the insight to formulate any useful comment. (not saying my others are particularly insightful or knowledgeable, btw)
    Imagine my surprise when I see you are continuing your “war” — and it’s your’s, not mine.
    I have explained my joke. I will add that I threw in the “white privilege” thing because 1) usually made by a white person and 2) I find it pretty offensive to those white people whose life could hardly be called privileged.
    I believe in class politics, not identity politics.

    Here are other jokes I posted. Please do feel free to parse them and explain my motives:

    “Look, first of all JPMorgan is one of the best-managed banks there is. Jamie Dimon, the head of it, is one of the smartest bankers we got and sometimes even he can’t get to the other side of the road.”
    this one was just a tweaking of a direct quote from the Bomber man.

    And this one:
    Why didn’t Obama cross the road?

    The rhetoric was soaring. On a chill day in January it kept us warm as we were witness to history. But reality is cold. Perhaps we were naive. We underestimated the intransigence of a Republican party that had grown increasingly extreme. Was there ever any chance that that road could be crossed?

    Oh. Actually I see you did have something to say about that one.

    It must be a difficult life to lead if you can read minds. That is a gift I would not want.

    1. Klassy!

      I have no idea. All I know is that I made a joke spoofing the TBogg mentality and suddenly I’m being accused of being TBogg.
      I’m nobody (by a TBogg definition– saw how he attacked a blogger who was unpaid). I’m not sure why anyone would make an effort to engage me in a fight.

      1. athena1

        Ok. I don’t think abortion jokes are funny or OK, but I’ll give you the benefit of the doubt and apologize.

        I’m sorry, Klassy.

        1. AllanW

          You don’t appreciate someone elses sense of humour but think it’s perfectly permissable to threaten physical violence and cyber stalking as you did to me on the ‘Election Night’ thread?

          I’ve steered plenty of people to this blog over the last few years because I appreciate the tone and content but if Yves remains comfortable with this standard of behaviour on her site I’ll sadly have to reverse course.

          No TK21, it doesn’t look like athena1 is ‘good people’ to me. See?

          1. Klassy!

            Yes, the cyberstalking threat was out of line and actually why I wanted to contact moderators. But it is probably best just to ignore people at this point.

        1. athena1

          I can’t help but wonder if Individual Donor Remorse is the new Foundation Money. The internet is a strange place like that.

  5. barrisj

    Right on cue this morning’s USA Today rag has quotes from “Wall Street sources” commanding Obama to “extend the olive branch to House Republicans” to “avoid economic disaster”…yadda-yadda-yadda. Pathetic, and the whole MSM meme currently about “reconciliation” is no more than the usual pleas for caving in to extremist Republican positions, even though the House is still populated by an unruly majority who clearly only represent the collective wishes of a slowly-vanishing minority of angry older white people sooooo out of step with the bulk of their fellow citizens. The notion that Obama and the Dems have to go hat-in-hand to seek “accommodation” with the moronic Right is risible on its face…but don’t let us underestimate Obama’s penchant for selling out his constituency – he’s done it before and he sure as shit will do it again. It’s all about “LEGACY”, you see.

  6. readerOfTeaLeaves

    Our inability to comprehend that growth is a careful balance of land, labour, capital and innovation – not a right that can be delivered sustainably through expedient means…

    This shouldn’t strike one as pure genius.
    But given the amount of other dreck in the system of financial reporting, this comes across as a gem of clarity.

    True cost pricing can’t arrive soon enough.
    Unfortunately, most electeds seem so gutless that instead of making Wall Street and finance pay the actual, true costs of their activities, instead they’ll dimply cave to these whiners. And give them a pony, to boot!

    1. Susan the other

      Land, labor, “capital”, and innovation as limited resources to be measured wisely is a nonsensical premise. All that matters is people. People make economies work. This article made my head ring. It is the cappie manifesto. They took a true statement, “our obsessions with GDP is going to harm our investment…” and advocated austerity! In fact I believe the opposite. I believe that growth is a totally synthetic phenomenon. Totally. We simply decide to do it. This is because I don’t think private profits and/ or returns are very important compared to social well being.

      1. Susan the other

        On second reading this article comes closer to my thinking – but not as close as it must. If we do not take the initiative as self-interested societies to improve our own lot and that of the planet in general we are missing a true opportunity and a wide-open window of opportunity.

  7. steve from virginia

    President Obama easily won re-election yesterday: Where do we go from here?

    – The Tea Party has unraveled as a political phenomenon. The ultra-libertarian/Austrian/liquidationist faction within GOP politic has discredited itself: the public won’t buy social Darwinism no matter how much religion and patriotic moralizing are spackled over it.

    – The GOP has no one to blame for the election outcome but themselves. Their primary process — dominated by petroleum industry stooges and ‘missionary evangelists’ — prevented the Republicans from fielding a candidate able to challenge the vulnerable Obama. Who could have beaten him? An ordinary human being … that is, a non-radical Republican automatically excluded from the candidacy … by the extremist-filtering primary process and funding structure.

    – From the ‘Welcome to the ironic universe’ department: this is the end of Ron Paul and his son, while there is no end in sight for Ben Bernanke. Gone: Palin, Santorum, Allen (in Virginia), Akin, Mourdock, Perry, Mack. Lost in influence: Bachmann, Ryan, Cantor, Gingrich.

    – Libertarian economics do not appeal to Americans who do not want to be thrown to the ‘free-market’ wolves any more than they already have been. Americans want a level playing field with big business. Disappointment with Obama is that he is unwilling to hold powerful interests accountable, not that they are held too accountable. The intrusive, overbearing government fails to do its job or it does so in ways that protect private interests at the expense of the public.

    – A big winner of the election is Occupy movement. They won by not embarrassing themselves and by helping out in New York City with the hurricane relief … where the reactionaries were notably absent. The crumbling Tea Party has left a political vacuum … if the Occupy group has the wit to seize the moment.

    – The clock is ticking on the tycoons. They couldn’t buy this election and won’t get a better chance in any conceivable future. The shift is underway … from tycoons being admired and emulated to being loathed. The step after is for tycoons to be hunted down like rats. Credit the timely hurricane Sandy and a rising public awareness of tycoon-driven climate change …

    http://www.economic-undertow.com/2012/11/07/hope-change/

    Obama is a lame duck but the reactionaries’ moment is gone forever. They are completely discredited … in the public arena that means the most.

  8. Doug Terpstra

    “Free” stock market volatility is shock doctrine formula in action. HFT market makers, Goldman, JPM, Citi, et al, are now engineering disaster capitalism expressly to facilitate Obama’s Great Betrayal. Nothing like Rahm’s “good crisis” and another threat of martial law to push whatever Wall Street wants through Harry Reid’s Roman Senate.

    A market meltdown is exactly what we must expect for Obama to fulfill his orders. It’s orchestrated. Nothing is as it appears in this centrally-planned, fascist economy.

  9. Up

    Yves, Marc was kidding about the 50%; he has an apocalypse image to uphold.

    He did say something interesting though: Obama will not finish his 2nd term. What is Faber getting at? He wouldn’t elaborate, he just said, that there was so much smoke, there had to be fire.

  10. Procopius

    I don’t get this sentence:

    Obama is more committed to cutting the deficit than Romney was, which will deliver less of a hit to growth, which is better for stocks.

    As I read this, you’re saying Obama’s deficit reduction (i.e., austerity) will damage growth less than Romney’s likely failure to do anything to reduce the deficit (i.e., mild stimulus). All the macroeconomists I’ve been reading for the last few years say it works the other way ’round.

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