The aftermath of the financial crisis continues to lap around the edges of the financial world like a giant oil slick. This is certainly understandable as the first year of this slump was every bit as bad as the Depression. Worldwide industrial production fell as steeply and worldwide financial markets were even more disrupted. While the pace of the recovery may be disappointing, the recovery is far better than the death spiral that continued from 1929 to 1933.
The difference is in the actions taken by governments. Rather than cut spending in an effort to balance budgets and raising interest rates to preserve the gold standard, today’s leaders have been willing to risk deficits while pumping funds into the economy. While the pace of recovery still lags that needed to get the economy back to full speed, the result of these efforts has led to an end of the recession and the beginnings of a climb to recovery.
Concerns still run high as shown by the continuing interest in the Inquisition of Goldman Sachs. While Goldman may have strayed from the ethical path, almost a dozen other merchants of debt also promoted even larger amounts of pools of subprime mortgages. A new economic history, This Time is Different: Eight Centuries of Financial Folly by Reinhart and Rogoff, attributes blame for the most recent crisis and its predecessors going back to ancient Greece to the creation of too much debt, public and private.
There were many culprits besides Goldman, including those who borrowed on their houses to buy wide screen televisions or even more houses. We are all paying now for these waves of borrowing and it is remarkable that the global recovery efforts are working as well as they are. Our much-maligned politicians end up with the responsibility for providing tools to clean up the mess. They have to broker their prospects for reelection amid emotionally charged political viewpoints of commentators and constituents while sorting out frequently conflicting advice from economists.
Most agree on the dangers of debt and all on those coming from debt that is not repaid. Goldman Sachs, for all its faults, paid its bills, unlike some of its competitors who are no longer with us. The threat of loan defaults always rattles financial markets, particularly when nations threaten “sovereign default.” The recent echoes by Greece of the debt default problems of ancient Athens scared European investors with ripple effects in U.S. markets.
The global economy has become so intertwined that it is increasingly difficult to relate cause and effect. In this case, however, the problems in the Euro area are weakening that currency with corresponding rebounding support for the dollar. That typically makes exports more expensive while reducing the costs of imports. It also tends to improve government balance sheets and should thus add a few more months in the U.S. to the current period of record low interest rates.
That will favor U.S. stocks, particularly those that can show earnings growth and dividend increases during this challenging economic transition. IBM (IBM-$127), which just raised its dividend for the 15th straight year, comes to mind. Even though their valuations are tempting, fickle markets make me avoid stocks whose reputations are endangered, like Goldman Sachs, BP, Transocean and Cameron. As the villain Iago said in Othello, “Reputation is an idle and most false imposition; off got without merit, and lost without deserving.” In today’s world, Iago would probably be with a mortgage fund.
The market’s rumblings are yielding overdue strength in U.S. medical stocks. Merck (MRK-$36), Bristol-Myers (BMY-$25) and Pfizer (PFE-$17) are stepping out of the wings to renewed applause. All three have above average yields and solid earnings prospects.