It’s Worse Than You Think

06/04/2012 11:05 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

A huge leadership void in the world’s major economies has left investors unusually exposed, writes senior editor Igor Greenwald.

“There are certain queer times and occasions in this strange mixed affair we call life when a man takes this whole universe for a vast practical joke…And as for small difficulties and worrying, prospects of sudden disaster, peril of life and limb; all these, and death itself, seem to him only sly, good-natured hits, and jolly punches in the side bestowed by the unseen and unaccountable old joker.

"That odd sort of wayward mood I am speaking of, comes over a man only in some time of extreme tribulation; it comes in the very midst of his earnestness, so that what just before might have seemed to him a thing most momentous, now seems but a part of the general joke.”—Herman Melville, Moby Dick.

Well, the joke’s on us in this hour of financial and economic dismasting, because this time it’s not investors sneering at onrushing calamity but governments, the very ones that are that are supposed to steer everyone clear of disaster.

With US stocks taking it on the chin late Friday in the aftermath of the lousy jobs report, there was plenty of speculation by trading types about what sort of inducements politicians might conjure by Sunday night to bolster markets.

And now the answer is apparent: slim and none, and slim has just been laid off owing to austerity. Out on the campaign trail, when not arguing with Mitt Romney about who is less qualified to lead an economy going nowhere in particular, President Obama is once again blaming Europe for doing too little to heal.

And the response from the leader of Europe’s Ostrich Party, German Chancellor Angela Merkel, is to once more rule out material help for the sinking Spain and Italy. Those large economies are failing more because of the euro’s flaws than their peculiar shortcomings, but no matter.

Never mind that George Soros is more optimistic than most in giving Europe a three-month window to save itself. Merkel’s “solution” is to push for fatter pay hikes for German workers, while urging Spain to seek a bailout like those that have kept Greece, Portugal, and Ireland on their knees.

The usual suspects are now said to be formulating the umpteenth European “master plan,” to be consulted by the end of the year.

Looking for the Committee to Save the World? The original has been put out to pasture, its reputation in tatters. And the current crop of would-be saviors in positions of power can’t agree on much of anything beside the fact that the fault for general inaction lies elsewhere.

The Obama campaign blames Congress for failing to properly stimulate the economy, while Romney blames Obama for investing in Solyndra. But Romney’s prescriptions are merely Bush redux, so it’s not clear that the candidate’s famous business acumen has really grappled with the problems at hand.

So the US is hopelessly divided as next year’s budget suicide pact nears, while Europe will be lucky to survive long enough to watch our swan dive off the “fiscal cliff.” But at least Asia has its act together, right? Their trains are said to run on time, at least.

Well, China’s supposed to come through with serious stimulus in response to a sharp economic slowdown any day now, except that no one has yet glimpsed that train.

The recent fall from grace of Bo Xilai revealed a leadership mired in corruption and internal divisions. The apparently victorious “capitalist” faction of the Communist Party, backing relatives in export industries, won’t be too quick to reward opponents entrenched at the large state-owned enterprises with money to build more ghost cities.

And then there’s Japan, which can’t even seem to be able to devalue a currency it can print in unlimited quantities, a currency whose strength is killing Japan’s multinational exporters. The broad Japanese stock market hit a 28-year low overnight, and meanwhile the ruling party is split by the prime minister’s plan to double the consumption tax to 10%.

At no time in the last 30 years has the world been this devoid of serious, confidence-inspiring leadership. The politicians currently in charge can’t seem to see beyond the next election and very narrowly drawn national interest.

Which means that, as nasty the news is, things can get worse: the global retrenchment has picked up a fair bit of wrong-way momentum. The relatively stable economies of the US and Germany have not yet felt its full effect. And Europe has hardly begun to reckon with the consequences of its impending breakup.

The fashionable thing to do today would be to look at the stock market’s heavily oversold near-term posture and broadly depressed investing sentiment and forecast a keep-‘em-honest rally. And we could get one any day.

But with governments all over feigning a devil-may-care nonchalance in the face of disaster, the devil may yet have his say.

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