Ahhhhh, the exciting, action packed, topsy-turvy, ridiculous week that was: Fannie and Freddie seemingly on the brink of failure; rumours swirling about PIMCO pulling business and money out of Lehman and refusing to engage in counterparty transactions with the Investment Bank; a new all time high for oil reached on intraday trading above $147 a barrel; and reports of military activity from both Israel and Iran, as that potential conflict becomes more possible each day. When taking all of these negative factors into consideration, you would probably guess that this past week would have been a bloody one on Wall Street; but you would have been wrong! The S&P 500 was down a measly 1.85% for the week, and the Dow Jones Industrial Average was off even less. Has the market priced in all the possible negative scenarios and is finally coming to a point where a temporary bottom may be formed? That is of course the million-dollar question. I am, by no means, proposing that a floor is now on the market and we can assume that prices can only go up from here; what I am suggesting is that I think we may have reached a point where a piece of bad news would have less of a detrimental effect in relation to the positive gains associated to a piece of good news, of comparable size and meaning. In this type of environment, I expect to see volatility decrease as the market moves sideways before deciding which path it will commit to for it’s next run.
I would like to take a moment to discuss the situation surrounding Fannie Mae and Freddie Mac. Although I am not an expert on these companies, I feel the need to express my views on the broader economic consequences of having a pseudo governmental agency holding over half of the mortgage debt in the United States. When such an entity attempts to operate in both the public and private spheres, conflicts that reach down to the very fabric of socioeconomic goals come to light. Public and private enterprises have starkly contrasting mandates, while commonalities in their function are few. The concepts of equality and fairness, freedom and property can spawn a heated debate among political economists. At the centre of that debate would be the distinction of public and private boundaries surrounding socially sensitive sectors of society. To create a GSE that has an obligation to produce profit for shareholders, when at the same time is forced to take on a portfolio of shady loans due to a government decree is counterintuitive and thus is less efficient in its current form than it would otherwise be if it were either completely public or private. The private sector has shown time and again that it has the ability to satisfy a popular need, and can do so without added bureaucracy and cost inherent in public ventures. It would be a very difficult undertaking to rearrange these GSEs, especially at such an inopportune time; however, action needs to be taken to ensure that these companies have the ability to stand on their own without having the government telling it how to do business.
As I said in last weeks post, inflation remains the primary concern for this economy, although it was on the proverbial backburner this past week. Import price inflation data, which was released on Friday, showed that even prices excluding petroleum have jumped markedly higher (you don’t want to know what they are when petroleum is included! J). This could pose a concern if these higher prices are passed on to the consumer, further solidifying and amplifying inflationary expectations. To take a cue from my personal role model, Larry Kudlow, inflation remains the single most significant tax on economic growth. In order to ensure a good long-term standard of living and stable economic progress and prosperity the Fed needs to take control of the inflation situation… like, yesterday!
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