|
February 14, 2003
Mortgage rates inched lower, sliding toward 5.75%.
Markets priced war with Iraq months ago, but this week are confronted with a situation spinning out of control, and a possibly permanent rending of the Western alliance. In the domestic foreground, a year-and-a-half after 9/11, the scramble for duct tape is an embarrassing confidence-cutter for the markets. Al Quaeda needn't blow up anything or poison anyone; a campaign of false alarms might paralyze us.
In the pure economics of the week, two things mattered: corporate earnings and Alan Greenspan.
There was the usual run of data, but it did not change perceptions. A modest rebound in January retail sales of things other than automobiles was more than canceled by a plunge in automobile sales. Industrial production rose .7% in January and capacity utilization rose to 75.7% (one percent above an 18-year low), but both have the air of pipeline-filling, not signs of acceleration. The University of Michigan's early-February reading on consumer confidence fell to a nine-year low.
The newest information on corporate earnings is awful. According to Thomson First Call, since January 1, forecasts of first-quarter 2003 earnings have been cut from 11.7% year-over-year growth to 7.6%; and forecasts for a second-quarter gain of 10.9% will end up at a mere 4% actual result.
The lousy week for stocks was universally blamed on Iraq. However, Iraq or no Iraq, given a corporate earnings trend like this, you expected an up week?
Even Alan Greenspan placed blame on "the intensification of geopolitical risks" for shaky markets and economy. The most interesting line in nine pages, referring to geo/pol risk: "If these uncertainties diminish considerably in the near term, we should be able to tell far better whether we are dealing with a business sector and an economy poised to grow more rapidly -- our more probable expectation -- or one that is still laboring under persisting strains and imbalances that have been misidentified as transitory."
These uncertainties are not going to diminish in the near term, and all you need to know about non-transitory strains and imbalances is contained in the corporate earnings paragraph, above.
This morning, as Hans Blix spoke, stocks rallied, and fright-money came out of bonds. As soon as the French foreign minister began to speak in favor of continuing inspections, in opposition to the US, markets reversed.
The US is stunned, in disbelief that France and Germany might oppose it. France and Germany are tempted to assert new European leadership, believing that the US can be rejected now, but will always answer the fire bell.
It's still early, two weeks to a month before the US must either act or stand down. France and Germany may ultimately support the US, but I think it is dawning on markets that there are greater risks here than war itself. Dawning, but not priced in: UN support or even acquiescence is now unlikely. If it is not forthcoming, the US is isolated, not France and Germany, and the absence of UN support may shortly pry Britain or Turkey from combat. War by the US alone is vastly more dangerous, and already-thin US public and Congressional support might collapse.
Peace has always been a good trade for stocks and bad for bonds. However, an uncontrolled collapse of the US offensive, its unsupported forward momentum tripped into a heap by a broken alliance -- that would mean chaos, stand down, come home, and perhaps a renewal of the recurrent American isolationalist impulse.
It's too soon to know if it's either/or, war alone or come home, but the only thing either one is good for: mortgage rates.
|
