Markets are mad, long live markets

Terence Corcoran, Financial Post  Published: Friday, September 18, 2009

While all around us are hailing the death of free markets and the end of capitalism, nobody seems to have noticed how ugly capitalists are now rekindling the global economy. For people who don't know how markets work and how self-interest drives business activity, two good examples of capitalist-like greed in action include the mini-boom in the North American auto market and the emerging bubblet in Canadian housing. More broadly, the U. S. financial sector, responding to market signals, is also back in the business of cranking out fancy investment instruments and paying bonuses to people who do. Business investment is picking up. Stock prices are rising, and gold is setting price records.

Capitalism is dead, eh? Well, long live capitalism--or at least as much capitalism as we are allowed to enjoy. It may be news to many, but the very market forces that allegedly triggered the financial crisis are now triggering recovery. As French President Nicolas Sarkozy ( "the markets are mad") and other leaders of the G20 gear up for their market-bashing Pittsburgh Summit next week, they do so surrounded by millions of people who are now chasing the new market signals offered up by changing market conditions and despite new government policy. Rather than bash free markets, the G20 should hold a one-minute prayer to give thanks that markets still work and that people respond in their own self-interested way to whatever economic signals they get.

Some of those signals may be crazy, based on bad or mad government policy, or on cheap money cranked out by monetary authorities. But in a mostly market economy, the right thing to do as an economic actor is to follow the money. If central banks want to inflate, the markets will drive gold higher and gold production will rise. It's inevitable. When the U. S. government, under Presidents Bill Clinton and George W. Bush, in cahoots with Congress, established absurd home ownership targets and government-backed easy mortgage regimes, the markets responded. Builders built, lenders lent, and buyers bought--and as interest rates went down they built, lent and bought even more.

The same holds for the U. S. "cash for clunkers" auto program. Consumers and automobile sellers aren't stupid. Acting in their own self-interest, they rushed into the market to get in on the $4,500 government cash handout. Auto sales boomed. Big sales pushes from Canadian auto sellers, offering their own cash-for-clunker programs, also boosted Canadian retail sales. The auto sector benefited from another market phenomenon as auto makers aggressively promoted high-end power vehicles. When people who want big cars see the coming campaign to push them into tiny powerless micro-vehicles, they move to stock up big cars at cheap prices.

With Canadian interest rates set at record low levels, home buyers are taking advantage of the market opportunity. Housing sales are jumping and bidding wars are again a feature of the home market. The Canadian Real Estate Association reports record sales activity for August, with prices moving up.

Capitalist corporations are also back in the game. Some may attribute signs of economic rebound to government stimulus spending. But three U. S. economists affiliated with the Hoover Institution -John Cogan, John Taylor and Volker Weland--wrote yesterday that private investment, not government spending, is driving growth in the U. S. economy (see excerpt on this page). "By far the largest positive contributor to the improvement was investment--which went from minus 9% to minus 3.2%, an improvement of 5.8% and more than enough to explain the improved GDP growth. Investment by private business firms in plant, equipment and inventories, rather than residential investment, were the major contributors to the investment improvement."

The recovery in equities and commodity markets since March has been decried by some as possibly another irrational bubble perpetrated by financial players on another tear through capital markets. Noriel Roubini, one of the forecasting industry's leading bears, recently wrote of the risks of W-shaped economic recovery or a dreaded L-shaped recovery.

For whatever reason, the market's capitalist players are betting on something better, proving doom-and-gloom forecasters wrong. Richard Salsman, president of InterMarket Forecasting Inc., is a good example of how the capitalist mind works. "We're not in the bearish, doom-and-gloom camp today, at least when we look out over the short-term horizon. The long-term prospects look grim--as the U. S. and other major welfare states move increasingly toward socialism and bankruptcy--but our models project, over the coming year, a further up-trend in equity and commodity prices." Salsman also says that since the government stimulus doesn't work going in, the end of stimulus will not matter coming out. What will hurt the economy, but not until 2011, are U. S. government tax increases scheduled for that year.

As market dynamics stimulate economic activity, you can bet that the politicians meeting in Pittsburgh for the G20 will be simultaneously decrying the market's madness and taking credit for the economic recovery the market is delivering.

Best Regards,

         Jeff Goethals, AMP

Accredited Mortgage Professional



Susan Greschuk

Susan Greschuk

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CENTURY 21 Sun Country Realty
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