Watch what Wall Street does, not what it says
by digby
I think one of the undercovered stories in all this hoopla is the fact that despite the constant scare mongering among politicians about The Market Gods being angry unless we throw old ladies into the streets and let millionaires keep every penny of their ill-gotten gains, the markets themselves have been saying something else entirely:
“U.S. Treasury bond investors — who most directly bear the risk of a government default — aren’t alarmed … investors remain confident the two sides will compromise rather than inflict what Obama called ‘catastrophic’ consequences. Yields on long-term U.S. debt are near record lows. ‘It’s ugly in Washington, and getting uglier,’ said Matthew Duch, a fund manager in Bethesda, Maryland, for Calvert Investments, which oversees more than $12 billion in assets. ‘But that is just resulting in even lower rates as the market is much more concerned about growth than if the U.S. will be able to pay their bills.‘”
That’s a rational assessment, I’d say.
Unfortunately the leadership of “the market”, the big names, are the ones the politicians all listen to and they have been Chicken Littles all year long:
From John Paulson’s call for a collapse in Europe to Morgan Stanley’s warning that U.S. stocks would decline, Wall Street got little right in its prognosis for the year just ended.
John Paulson, who manages $19 billion in hedge funds, said the euro would fall apart and bet against the region’s debt.
Paulson, who manages $19 billion in hedge funds, said the euro would fall apart and bet against the region’s debt. Morgan Stanley predicted the Standard & Poor’s 500 Index would lose 7 percent and Credit Suisse Group AG foresaw wider swings in equity prices. All of them proved wrong last year and investors would have done better listening to Goldman Sachs Group Inc. (GS) Chief Executive Officer Lloyd C. Blankfein, who said the real risk was being too pessimistic.
The ill-timed advice shows that even the largest banks and most-successful investors failed to anticipate how government actions would influence markets. Unprecedented central bank stimulus in the U.S. and Europe sparked a 16 percent gain in the S&P 500 including dividends, led to a 23 percent drop in the Chicago Board Options Exchange Volatility Index, paid investors in Greek debt 78 percent and gave Treasuries a 2.2 percent return even after Warren Buffett called bonds “dangerous.”
“They paid too much attention to the fear du jour,” Jeffrey Saut, who helps oversee about $350 billion as the chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said by phone on Jan. 2. “They were worrying about a dysfunctional government in the U.S. They were worried about the euro quake and the implosion of Greece and Portugal. Instead of looking at what’s going on around them, they were letting these macro events cause fear to creep into the equation.”
I would say that’s undoubtedly part of it. These people think they are experts in everything including politics and mingle with all the insiders and so believed the hype. It was a panic feedback loop as the political types all thought they were listening to the oracles of Delphi (they must be geniuses in everything — they’re so rich!)
But on the other hand, it served them pretty well. They managed to keep everyone’s eyes focused on a portential future problem (the deficit) so nobody noticed Dodd-Frank being watered down, the lack of a financial transactions tax being on the table and the capital gains tax and estate tax being kept very low. (I’m sure no one will forget that Mitt Romney only paid 14% in taxes and that was in years he knew he’d probably have to make public.)The real revenue we might have gotten from Masters of the Universe was largely left alone. I’d call that a win for them, despite their bad calls. I’m just not sure they’re really clever enough to have planned it.
Still, their fear mongering has infected the dialog in the beltway in a truly pernicious way. The Villagers treat their every utterance as if it was the word of God. And yet, like all Very Serious People in recent years, they couldn’t hit water if they fell out of a boat. Go figure.
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