E-piphany

I don’t really think the 3-day, 5% fall in equity markets this week was prelude to “the big one,” but I think it is very interesting that we are still nervous about “the big one.”

I think the cause of this latest downdraft is pretty clear, and it isn’t immediately clear to me that it’s over. The Administration’s attack on Wall Street is going to end up being far more costly for the nation than the Bush Administration’s prosecution of the war on Iraq, not just in the short run where whatever stock market wealth is lost can be recouped but in the long run where the cost is measured in higher costs of trading, less-efficient distribution of capital, concomitantly higher costs of that capital, and (as a result) slower long-term growth. If you want to turn a deep recession into a depression, the first thing I would try would be extremely tight money – and the Fed has really done a great job of avoiding that repeat of Depression I. The second thing I would try is tearing apart the capital markets structures that connect borrowers with lenders and investors with inventors.

So there’s nothing particularly mysterious about this selloff. Explanations on Friday included repeated rumors that the data Greece provided to join the ECB had been doctored (which rumor turned out to be true when over the weekend ECB President Jean-Claude Trichet stated as much), but that trireme has sailed…who cares how Greece got into the ECB? The question is whether they’re going to be kicked out. Another proffered explanation was the notion that Chairman Bernanke’s confirmation by the Senate for a second term as Fed chief was in trouble. I certainly can’t see why that would be bearish, given what he has brought to the office!

So I don’t think the 5% decline means the end of the world is nigh. Having said that, one precondition for the end of the world has been met: Abby Cohen is bullish.

But the re-developing crisis is global. The one I worry about is U.S.-specific, and we are not out of the woods there. I will talk about my fears tomorrow.

Speaking of Monday, the data on tap is Existing Home Sales, which has been one of the more confusing series recently. A spike over the last few months, to6.54mm units, is likely the product of both tax incentives and the release of some stranded properties onto a finally-functioning housing market. (I wrote about the spike last month here.) Consensus estimates call for a retreat to 6.0mm units (annualized pace), which is still pretty robust and sounds to me a lot like a wild guess.