The Market Is Catching Up To Expectations

Well this is sort of an unpleasant update as the S&P now has a "6" handle in front of it. It would appear that the market is quickly (actually at lightening speed would be more accurate) moving to reflect the current conditions in the world. I had talked about this in my first post. The "Obama-mania" was still holding strong and eurphoria about the latter half of 2009 was the consensus. Oh have times changed in the first couple of months of this year. The S&P is now down 23% year to date.

What has changed?

1) Chinese GDP numbers are coming down below the 8% target, albeit slowly.
2) The global banking system is still in disarray. I would suggest Geithner is clearly part of the problem and not capable of being part of the solution.
3) Equity markets do not like uncertainty and this is what we have. The line of "we don't want to nationalize" is getting old. The Government is embarking on a form of creeping nationalization. Whether is be Citi, B of A or any of the weaker regionals. All I know is that the government's stake continues to rise while the equity price continues to fall.
4) The market is beginning to realize that the concept of funding insolvent institutions with taxpayer money is NOT A GOOD IDEA. My guess is we will see a few major bankruptcies in 2009. These institutions will have received TARP (or TRAP) money and it will be lost. This could have been used to help banks that were solvent maintain strong balance sheets. Zombie banks are here to stay.
5) European banks are worse. Watch for more commentary on loans to Eastern Europe. This will not end well as leverage here was higher than in the US. This is a systemic risk. The belief that the German's will save everyone is a little far fetched. The problem is just too large.
6) The US Fiscal Stimulus is the first step toward socialism. We heard lots of talk about infrastructure rebuilding etc. Where was it in the final bill? Ok there is about $100 billion to infrastructure but this bill is to be spent over 11 year and will not contribute meaningfully to the economy when it is needed most.
7) The Great Depression and the Japanese lost decade both had ill timed tax inceases which further supressed consumer spending. The US is heading in this direction right now. Take a look at how the carbon cap and trade system will work. Investors know that in 2011 there will be a large tax increase for everyone. Markets don't like tax increases.

Really there has been no "good" news in the past month or so and in fact the rate of decline has accelerated. We need to watch how governments around the world move to solidify the financial system. This will go a long way in to determining if we make the same mistakes that the Japanese did. History has a way of repeating itself ... don't forget the "Lost Decade".