"The Kindness of Strangers"

Sydney M. Williams

Thought of the Day

“The Kindness of Strangers”

February 25, 2010

As Blanche DuBois says, as the doctor leads her away in the final Act of A Streetcar Named Desire, “Whoever you are, I have always depended upon the kindness of strangers.” Similarly, the United States, if the recovery is truly to take hold, must depend upon growth in Asia.

With consumers in deleveraging mode and business subject to an Administration intent on transforming the U.S. economy with its preference for government intrusion into energy (carbon taxes) and health care; its emphasis on the environment, regardless of costs, and its already announced $122 billion tax on business foreign profits and a redistributive tax policy, it is not surprising that confidence has once again ebbed. Daniel Henninger writes in today’s Wall Street Journal: “…while the tax and economic policies of the past four presidents worked for the economy – birthing whole industries – it was bad for society”, which, in part, explains President Obama’s socialist tendencies. His political philosophy carries risk. It is worth recalling the admonition from Charles Munger and his parable of Basicland, which I mentioned yesterday.

While most indications continue to suggest continued economic recovery, there are some worrying signs. The ECRI (Economic Cycle Research Institute) Lead Index, which foretold the recovery we saw in last year’s second half, has decreased recently. For the week ending February 12 the Index declined from 130.0 to 128.4. As the authors state, the Index “is still consistent with continued recovery, but a turning toward more significant declines would be a warning sign of a stalling recover.” The reading for the week ending February 19 should be out tomorrow. It is published in Investor’s Business Daily.

The lead article in yesterday’s Wall Street Journal dealt with bank lending. According to the article, the decline in bank lending was the lowest since 1942. With commercial loan problems looming, banks have been strengthening their balance sheets, making them reluctant to lend. Additionally, but unstated, is that securitization (the shadow banking system) has dried up.

The current reading of the Baltic Dry Index, an imperfect, and arguably volatile, measure of world trade has declined 41% over the past three months, from 4661 to 2724.

In testimony yesterday, Fed Chairman Ben Bernanke emphasized that last week’s cut in the Discount Rate was not a precursor of rate declines – that he expected rates to remain low for the foreseeable future. This less than robust view of the economy encouraged investors who, perversely, lifted the Dow Jones 92 points yesterday. (I guess persistent low rates, a factor leading to the credit crisis of 2007-2008, are viewed more positively than economic growth?)

I continue to expect economic recovery will gradually continue, but domestic headwinds exist and we are going to have to rely on strangers in Asia to help in the extrication process.