11/12/2012 6:30 PM ET|
Why the market seems so worried
The election is over, but uncertainty about the eurozone and concerns about the US fiscal cliff are likely to result in continued volatility.
Investors who had hoped for an election victory by the Republican Party and Mitt Romney were quick to label the stock market's plunge in the two days that followed as a logical reaction to President Barack Obama's win. After all, they argue, a continuation of Obama's policies means that the United States is doomed to follow in Greece’s footsteps.
Let's dispense with that point first. The United States is in no imminent danger of becoming the next Greece. While the U.S. government budget deficit is unquestionably too high, interest payments on U.S. government debt as a percentage of the gross domestic product are well below those that Greece must pay. Similarly, the current account deficit, as a percentage of GDP, is a third of that of Greece.
As things stand today, we can finance that debt far more easily and cheaply than Greece can: Current rates on 10-year Treasury notes are below 2%, while comparable Greek government bonds currently yield north of 18%. Global investors are still willing to own dollar-denominated assets, recognizing that the U.S. economy is vastly more flexible, more innovative and more productive than most other developed economies. The unemployment rate has been coming down in the U.S., but it's been skyrocketing in Greece and hit a new high of 25.4%, up from 17.5% last November.
Yes, legislators in Washington must find a way to avoiding running full-tilt off the "fiscal cliff," and must do more than simply provide a band-aid solution to the underlying problem of revenues being inadequate to sustain current spending levels. That is common sense, as is the idea that both the Obama administration and the Republican Party must come to the table prepared to compromise on some of their cherished objectives.
But this week's market sell-off has as much or more to do with real fears of what may be brewing in Europe as it has with apprehension of what may happen at home. Practically speaking, the election outcome doesn't much change the likelihood of avoiding the fiscal cliff: The makeup of Congress, in whose hands a solution lies, hasn't altered enough for that. It's hard to see how a Romney victory would have made congressional Democrats more willing to compromise than congressional Republicans are -- in practice, not just in rhetoric -- after Obama's win. What is new are the renewed uncertainties about what is happening in Europe. As the election campaigns reached their climax in recent weeks, the eurozone crisis had been consigned to the back burner, thanks in part to European Central Bank chief Mario Draghi's pledge to do "whatever it takes" to resolve matters.
Now the limits of his ability to act on that pledge are becoming apparent. True, the Greek parliament did vote in favor of another round of austerity measures, in spite of a general strike and demonstrations outside the legislature in Athens. But almost at the same time, Draghi -- whose statements and actions have done so much to shore up investor confidence that the eurozone crisis can be contained, if not resolved -- delivered a blow to markets by declaring last week that the European Central Bank is "by and large done" when it comes to helping Greece.
The ECB can't take a haircut on the Greek bonds it owns as part of a possible bailout; that, Draghi said, would be the equivalent of "monetary financing," something that is outside the remit of the central bank. Instead, he put the question of resolving Greece's debt crisis -- and the challenge of finding a way to make the country's debt load sustainable -- squarely back in the hands of the eurozone's politicians. It's up to the politicians to repair public finances and remove obstacles to growth, he argued.
And if we are worried about the ability of our own legislators to resolve the U.S. deficit, we can at least take comfort in the fact that all are committed to the concept of the United States and ensuring its future prosperity. In Europe, the idea of "union" is only a few decades old; monetary union is only little more than a decade old and a principle that many of the region's largest economies, like Britain, don't subscribe to at all, and one that many Germans reject if it means they will be footing the bill.
Add to the political hurdles the fact that the eurozone's economy clearly seems to have stalled: Austerity programs on the periphery contributed to a 0.3% GDP contraction in the second quarter and the EU expects a decline of 0.4% in GDP for 2012 as a whole this year, and growth of a mere 0.1% next year. Unemployment is at its highest level since the Euro's debut in 1999, at 11.6% across the region.
That is bound to weigh on U.S. financial markets. The country's largest banks, with a few exceptions, have exposure to the European economy and to the region's banking sector, however carefully they have managed that exposure. Most of the larger companies in the U.S. are in reality global businesses, deriving a significant portion of revenues and profits by selling goods in Europe and other overseas markets. We may think of McDonald's (MCD), Gap (GPS) and Colgate-Palmolive (CL), to name a few companies at random, as American companies, but they are household names in Paris, Frankfurt, Florence and Seville as well. Other businesses -- Netflix (NFLX), for one -- are striving to build a presence in Europe at this uncertain point in time.
So it's hardly surprising that the stock market would react dramatically to an intensification of the eurozone uncertainty, even as other sectors (energy stocks, coal mining companies, banks) see the last of the gains they had experienced in anticipation of a Romney victory vanish in the wake of the results.
The reality is that we're about to enter into a period of market uncertainty and volatility fueled by macroeconomic concerns both at home and abroad. Each fresh piece of political rhetoric or news, whether from Berlin, Athens or Washington, is likely to roil markets. That's particularly likely as the third-quarter earnings season draws to a close, giving us fewer distractions. Absent a miracle in the form of an early (pre-Thanksgiving) resolution to the deficit negotiations at home, or a sudden about-face on the part of Germany's leaders with respect to European bailouts, we're likely to have to live with nervousness and uncertainty for the rest of the year.
To borrow the famous lines uttered by Bette Davis in "All About Eve": Fasten your seat belts. It's going to be a bumpy month.
More from The Fiscal Times:
VIDEO ON MSN MONEY
Why didn't they mention that the Federal Reserve is buying most of the U.S. Treasury Bonds?
because they are smart enough to know Obama and the democrats are big govt union lying spending socialist!
and in 4 years all those morons who voted for him are gonna realized they were duped! not once but twice!
This writer never took logic in college. The reason our unemployment is lower than Greece's is because the actually count their unemployed. We make ours up!
Here is the way it works. Did anybody see Gov Cuomo ask for 50 billion $ to cover the storm. He'll get it New York voted for Obama. Texas hasn't had rain in 6 years and the cattle herd is 1/2 of what it used to be. But when Gov Perry asked for help he was told to go pound sand.
Nobody caught Gov Cuomo's outrage when he couldn't get power poles to turn the electricity back on. (see liberals won't let you cut trees because it endangers birds) Guess what Gov in a few months you won't be able to get a steak either. But don't worry. Obama will print you the money. Where do you think the 50 Billion will come from. You want fries with that? Bona petite!
so who thinks the obummer votes came from the millions of unemployed and /or illegal non tax paying llegals ? ( Not to minimize the "lost" military absentee votes who everyone knows were anti Obummer)
This is the biggest scam EVER and the whole world is laughing at us, who somehow allowed this to happen---why no recount of absentee military votes? Why are illegals allowed to vote in America but nowhere else in the world? could it be Power and Money?
This election was an outright act of theft by obummer and team - soros, etc...
How can 50+ Philadelphia voting districts have ZERO votes for Romney, ditto in Ohio and elsewhere.
There were also VERY FEW US Soldiers absentee votes due to a - plane crash carrying the absentee soldiers ballots!? Huh, what! obummer won ZERO states with Voter Identification laws. Get the Picture here; also Computer hacking of the software in voting machines - quite easy to do, google it. Yep, we are a BANANA REPUBLIC with dictator obummer and the puppet masters laughing their as$e$ off yet AGAIN!!! Without this voter fraud - Romney would have easily won. Of course we will never know - because Romney is a girly -man nice guy like all of his handlers, not street thug criminals like the democrats. He should have immediately called voter fraud and a re-count of all the swing states.
Until the republicans go ALL OUT NEGATIVE - ie, just tell the truth about obummer and all of the Dem's, they will never win another Pres. Election. They also have to call obummer what he truly is - a mass killer of babies - unborn and also apparently born - google it - from his illustrious Illinois Senate days.
Good luck USA when Iran gets a nuclear Bomb. obummer is certainly not going to stop it, in fact he is encouraging it. How will we do anything in the Middle East again? All Iran has to do is threaten to exterminate Israel, or block the Straits, etc. What are we going to do when they get the bomb? Little voters did not bother to think about that one either, huh.
Ok msnbc, we all know the market is tanking because of obama. Say what you want.
Obamas first post election White House conference is made up of Unions, radicals, entitlement and spending proponents, greenies, academics etc-not one business person.
If you arent worried, you should be now knowing the payback is off and running.
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