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A Confidence Crisis, Not a Money Crisis

Stock-Markets / Credit Crisis 2009 Feb 07, 2009 - 09:02 PM GMT

By: Clif_Droke

Stock-Markets

Best Financial Markets Analysis Article“Though the life of a man be short of a hundred years, he gives himself enough anxiety as if he were to live a thousand.” --Ancient Chinese proverb

The crisis we keep hearing so much about, which formally began in 2007 and intensified in 2008, was at root a crisis in confidence. True, the credit crisis had its origins in the tight money policy of the Federal Reserve beginning in 2004 and continuing into 2007. So there was definitely a money/credit aspect to the crisis. But more than any single factor – and this has been especially true in the past few months – the crisis has been more about shattered confidence than a dearth of liquidity.


Institutional and retail investors alike are still suffering the spillover effects from a lack of confidence in the financial system. It’s not that they utterly lack capital; they’re simply too afraid to spend it until they see evidence that the bailout and economic stimulus initiatives are working. Investors are still in the proverbial bunker and they’re not about to come out until they’re sure the thermal radiation from last year’s atomic blast has cleared. The main problem for investment markets today isn’t liquidity…it’s psychology. That’s why I believe the best clues for what’s coming up in the stock market is likely to be seen in the psychology indicators more than anything else.

In the January issue of its Perspective newsletter, Dr. James Paulsen, Chief Investment Strategist of Wells Capital Management, observes:

“The single, most effective economic policy introduced by officials in this crisis was a two-week ‘fear-mongering campaign’ implemented by the U.S. leadership during the selling of the TARP program to Congress and the nation in early September. The fear generated by this campaign has been remarkable and it has created a ‘healthy player’ problem. Most of the current economic collapse is due to healthy consumers which have a job but nonetheless have chosen to postpone spending plans until they ‘see where this is going.’ It is due to relatively healthy companies which are still making money but have decided to temporarily freeze hiring until ‘things clear up.’”

The key statement made by Dr. Paulsen in his analysis is this: “Normal cyclical policy tightening can perhaps why the economy is recessing, but only widespread paralyzing ‘fear’ explains why the economy is collapsing.”

This is an excellent point and worth pondering. It’s not a lack of money that is now bothering market participants…it’s a lack of confidence born of excessive (and unfounded) fear. It stands to reason then that once these investors (and I’m speaking mainly of institutional investors/hedge funds) put their fears aside, the stock market will have a huge weight lifted from off its shoulders can then take off without being dragged down by the “fear factor.”

Indeed, it has been fear and fear alone that has kept a lid on the cyclical bull market from picking up steam. Cycle-related influences can’t be blamed on the market’s stubborn refusal to take off. The Kress 6-year cycle bottom has passed and so as the nearest intermediate term weekly cycle, so any further “dragging” action by the market from here can only be chalked up to excessive investor fear.

At some point, however, that fear will almost certainly be shed as investors grow weary of receiving 0% return on their “safe haven” investments. A worthwhile interim market bottom typically averages three months and the stock market has been bottoming now for at least that long if not longer.

The action in the market’s leading indicators also continues to look encouraging. After a high volume breakout above its dominant interim 90-day moving average last month, IBM continues to resist the general market malaise and is closer to its October high than its November low, in contrast to the major averages. As I mentioned to you, I’ve rarely seen IBM look this good without the broad market eventually following it higher.

Getting back to Dr. Paulsen and his analysis of the U.S. financial market outlook, I echo his sentiments that the stock market has most likely bottomed and should recover in 2009, at least on an interim basis. “Fear is already too elevated,” he concludes. “Most of the nervous Nellie investors have already sold, values have already been restored, competitive interest rates are already too low, too much unspent buying power now sits on the sidelines and policy officials will likely finally succeed in their rescue efforts. Even if it does take some time before recovery materializes, it will be worth the wait. The upside for risk asset prices (stocks, credit bonds, and commodities) should be considerable once confidence begins to improve!”

So here we stand, still waiting for those last remaining vestiges of fear to erode from the hearts of investors. The monetary factor has already been addressed by financial regulators. It remains up to the collective mass of market participants to decide when they’ve had enough of waiting in fear and trepidation on the sidelines while a bargain-priced stock market beckons them to return. History says those fears will fade…let’s hope that it’s very soon and that our wait won’t be any further extended by the “fear factor.”

By Clif Droke
www.clifdroke.com

Clif Droke is the editor of the daily Gold & Silver Stock Report. Published daily since 2002, the report provides forecasts and analysis of the leading gold, silver, uranium and energy stocks from a short-term technical standpoint. He is also the author of numerous books, including 'How to Read Chart Patterns for Greater Profits.' For more information visit www.clifdroke.com

Clif Droke Archive

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Comments

Ken Larson
08 Feb 09, 08:24
YET ANOTHER GOVERNMENT/ INDUSTRIAL COMPLEX

Whether or not the average US Citizen knows it, the United States is creating the second-largest government/industrial complex in our nation's history. It is envisioned as a tail of bailouts to the financial industry, the automotive industry and others who show up with their hands out and their lobbyists in tow. It is also comprised of state governors who are poised to invent yet another form of pork with federal representatives and senators at their sides while raising local taxes for the citizen back home. This speculative panacea cannot survive.

HISTORY

The longest running and largest consortium of this type is the US Military Industrial Complex (MIC), funded each year at an amount many times the Wall Street and automotive bailouts combined. It is the elephant in the room in the burgeoning financial crisis, carrying the weight of wars, weapons systems and a pentagon/corporate financial relationship based on cost plus and time and material contracts since World War II:

http://rosecoveredglasses.blogspot.com/2008/09/two-collapsing-towers-wall-street-and.html

IMPORTS AND EXPORTS

We are importing goods and services and borrowing money from the Chinese, the European Union, Japan, Korea, India and other developing countries at a rate unmatched in our history. Loan proceeds are being used to fight wars and bail out our bankers, car makers and state governors.

Our largest export today is our public debt and our credit rating is slipping.

THE ILLUSION

What shall the prospective, second-largest government/industrial complex be called, “The Department of Wishful Thinking”? It is being financed with money borrowed from entities future generations will owe as the US kicks the financing can down the road like it has for the last 60 years.

No doubt Washington will attempt to regulate the outlay, put in auditors and control mechanisms like the Federal Acquisition Regulation and Cost Accounting Standards that evolved over the years on a reactive basis dealing with the white elephant scandals in the Military Industrial Complex. But somehow those controls have never been able to stop the mammoth waste, fraud and abuse that occur in the MIC.

Big money attracts greedy people, not only in the MIC but also on Wall Street and in the corporate boardroom. It also buys influence and crooks in government.

FACTS

The natural order of economics is still out there. Washington's money-and-power-influenced, artificial reality cannot survive what historically has been the rise and fall of booms and busts in the last 100 years. Economics is now on steroids through high technology, the Internet, mass communications and frauds that cross national borders like cobwebs.

The MIC will be scaled down by collapse. The Russian MIC led to that country's financial demise. It is now apparent that we did not outspend the Russians at weaponry and interventions. We simply had a better credit rating that is now maxed out

The other government agencies will be re-scaled and downsized as well but not by any specific action taken by the pending or future federal establishment. The over 50 entities that make up the federal government, together with their corporate outsource services, will be shrunk dramatically because the US is broke. The feds will fight to preserve the artificial reality, but US financing and credibility on the world stage are drying up and the creditors are suffering.

No new administration can change the above facts by riding on the taxpayer's back with "Social Improvement", " Public Works" and "Creating Democracies in Other Countries" mantras. Such policies in the past have led to foreign interventions, thousands of young soldier’s s, bureaucratic growth in Washington and bloated corporations performing low quality service contacts.

Annual budget deficits and the national debt are at intolerable levels.

ECONOMIC REALITIES

The US will come home from military adventures abroad because it will no longer have the money to run them and it will cease bailing out failing commercial establishments because there will be no funding for that.

The US will re-align priorities at the state and the national level much like all the little "Joe the Plumbers" throughout the country, who are toting skinny 401K's without jobs. They represent the present and future tax base upon which this country will run. America will not spend its way out of this dilemma because there will be no cash or credit left to spend.

The US will demonstrate financial prudence out of necessity, align spending with available revenue, downsize the federal government and its corporate cadre, cultivate technology and the small business base and take care of its most important constituent here at home - the average tax payer.

The US will understand the above are not political objectives but economic realities that are here and now. World economics will not allow a new, financial, government/industrial complex to emulate or replace the MIC.


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