Regime Uncertainty

Could the president please make up his mind?

The sound bite that got all the play yesterday was this: “What I’m looking at is not the day-to-day gyrations of the stock market, but the long-term ability for the United States and the entire world economy to regain its footing. And, you know, the stock market is sort of like a tracking poll in politics. You know, it bobs up and down day to day. And if you spend all your time worrying about that, then you’re probably going to get the long-term strategy wrong.”

Leave aside the particulars of his economic policy, and that’s a fair enough statement.  But then, what prompted him to say this in the next breath?  “On the other hand, what you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.”

This sounds like someone trying to have it both ways: “I don’t give a flip about the stock market… but you know what, there are some mighty good buys out there right now.”  Mixed messages, if not necessarily a blatant contradiction.

There, in a nutshell, is the reason the S&P has tanked 30% since Election Day, and roughly 13% since Inauguration Day.

The scholar Robert Higgs sums up this phenomenon with the delicious expression, “regime uncertainty.”  It’s when investors choose to sit on whatever money they have rather than put it to work creating wealth, because they have no idea what the rules are going to be day to day.  Higgs applied the term primarily to the New Deal, but we’re seeing the phenomenon at work today.

We see it when the administration chooses to run up record deficits, but then Tim Geithner says it’s “crucial” to bring deficits under control.

We see it in every speech Geithner gives about the shape of TARP II, in which the parameters change as quickly as those of TARP I under Hank Paulson.

We see it in Geithner’s commitment to go after “tax cheats,” a declaration shorn of any self-awareness or irony.

Conventional wisdom has it the broad stock market won’t recover its losses for three to six years.  But if this administration continues to take its cues from the New Dealers, we’re looking at another 16 to 23 years.  Figure it this way: The Dow finally returned to its 1929 levels in 1954 — a 25-year gap.  Assume the market topped in 2000 and the 2002-07 runup was a bear-market rally, then we’re looking at a recoup of the losses by 2025.  If the top came in 2007, then it’s 2032.  A “long-term perspective” indeed, Mr. President.

And if the president is focused on P/E ratios, perhaps he should ponder this: If P/Es are near historical norms right now, and if Q4 earnings are about to take a major hit, doesn’t that imply P/Es are about to grow?  And prices will have to fall further to come back in line?  Just asking.