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January 31, 2003
By Louis S. Barnes Friday, January 31, 2003
Mortgage rates this week again held the post-New Year's low at 5.875%.
We got some new economic data (soggy), but everyone in and connected to the financial markets swears that nothing matters except Iraq. Further, they insist that economic activity is suppressed by Iraq worries, and as soon as Iraq is resolved, the economy and stocks will race higher. (Ask 'em about ongoing worries about North Korea, terrorism, Indo-Pak nukes, and they go blank.)
Today, the stock market picked up 50 points in seconds after the news flash that Tony Blair had called for a new UN resolution specifically authorizing force. If Blair doesn't have the votes in Parliament, and the Brits bolt,... if, if, if.
Risk.
For most normal people, risk generates anxiety, usually the free-flowing, non-specific variety. Most of us have a hard time isolating risk in our minds, and keeping it from affecting the rest of our thinking, especially our decision-making.
In the financial markets, the identification and quantification of risk, one discreet component at a time, is the essential work, all day, every day (except for time out to sell things). However, no matter how accustomed the markets may be to evaluating risk and adapting to it, if the world throws enough haymakers in a short enough span, the people in the markets can be rattled.
Addled, as now.
Anybody under the age of thirty-five grew up in markets defined by the New Economy, New Paradigms, and believers got rich. That entire body of thinking -- technology-to-infinity -- has been dying hard for three years, but stunned participants still haven't processed the news.
In the lifetime of everyone in the markets, recessions and recoveries have followed certain patterns. Some cycles have been deep, some shallow; some long, some short, but the pattern since 1945 has been reasonably predictable. Not this one: we are in a post-bubble condition indistinguishable from post-1929 except in one respect: for seventy years, our banking system has been designed to prevent another Depression, and it is working perfectly. Still, an out-of-lifetime-experience cycle is an out-of-our-minds experience in the markets.
If you are thirty-five or younger, your main memory of the Cold War is the Ode-to-Joy party at the breach of the Berlin Wall. A lot of people under fifty never took the cold war seriously, anyway. You have to be fifty-plus to remember Kennedy's missile crisis speech, or the rehearsal visit to a fallout shelter later that night, or Adlai Stevenson at the UN in the days following.
It has been a terrible shock to all those kids younger than I, and to many as old, that there are bad guys out there. We are not and will not be as safe as we thought we were after the Wall came down. No matter what we do with or to Iraq, bad-guy risk will remain and re-appear. There will be times when we think we should go to war, and afterwards will be glad we did, or wish we had or had not; and times when we do not go to war, and later will be pleased or regretful.
Not even a quick and relatively painless resolution to Iraq will relieve the sense of elevated risk from a blown tech paradigm, blown bubble, and blown illusion of safety.
This is not a "soft spot": it's a tough one. We will adapt, but it's going to take time. In the meantime, there is no help to be found in overconfidence in our power, economic or otherwise, nor in denial, nor in facile pacifism.
Meantime, next week we get the purchasing managers' data on Monday, jobs data on Friday, and Colin Powell goes to the UN. Hold on tight.
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