by John M. Curtis
(310) 204-8700

Copyright April 3, 2009
All Rights Reserved.

        Wall Street usually leads the economy out of recessions and this time may be no exception.  Recent economic news indicates, as Fed Chairman Ben Bernanke predicted March 15, the recession may be bottoming out.  Just when the rest of the world counted the U.S. out as the leading economic power, Wall Street made a spectacular turnaround from its March 12, low of 6,500 to breaking 8,000 only three weeks later.  When Wall Street rallies, American businesses have the cash to hire back workers, something not seen for some time with March job losses estimated at over 700,000.  Before the White House traveled to London for the G-20 summit, global pessimists talked about dumping the U.S. dollar as the world’s reserve currency.  Watching Wall Street stage a furious rally climbing nearly 20% since March 12, shows that the world shouldn’t bet against the U.S. economy.

            When proverbial Wall Street bear New York University Stern School economics professor Nouriel Roubini predicted the Dow’s bottom at 5,000 March 9, the message was heard loud-and-clear at Goldman Sachs.  Whether admitted to or not, the Manhattan-based investment bank acts as Wall Street’s brain, determining the direction of the market.  When Wall Street’s kingmaker accepted $11.9 billion in bailout cash from AIG Insurance, eyebrows raised, especially because AIG Chairman Edward Libby sat on Goldman’s board.  With French President Nicholas Sarkozy threatening to boycott the G-20 unless real global restrictions were placed on key players like Goldman Sachs, it sent a loud message.  Goldman Sach’s sales of derivative investments to domestic and foreign banks, and AIG’s lucrative credit default swaps, were largely blamed for the global financial crisis.

            Wall Street kingmakers can be very bad or very good for the economy.  Only lately, has Wall Street refrained from selling off, continuing to rise from its March 12 lows.  When Wall Street got wind of another 720,000 layoffs, it didn’t faze yesterday or today’s rally, taking the Dow up to 7,978.  When Wall Street talks about “investors,” they’re talking about the nation’s biggest funds that get buy-or-sell signals from someone.  “Everyone is in a buying mood,” said Eric Ross, director of research at brokerage Canaccordd Adams.  “Everyone is feeling good . . . A lot of this is simply confidence,” perpetuating the same myth that mood or sentiment drives the market.  When programmed trading kicks in, it’s not based on mood, it’s based on getting the buy-or-sell signal.  Goldman Sachs recognized that enough-was-enough March 12, prompting the three-week long rally.

            Nothing in the economy has fundamentally changed, with unemployment rising and real estate prices plummeting around the country.  Yet, according to Ross, market psychology has changed.  How about the fact that the March 12 bottom caused Bank of America sink to $3 a share and Wells Fargo, an otherwise stable financial institution, drop to $8 a share.  Even J.P. Moragan Chase watched its stock fall to $15, compared today’s close of over $28.  Around the time Goldman Sachs shares bottomed $47 a share, AIG was handing the well-capitalized investment bank $11.9 billion.  No one can explain why the government needed to bail out Goldman Sachs when their share prices soared compared to other financials.  When Treasury Secretary Timothy Geithner looks into revamping Wall Street’s regulatory scheme, he needs to look into what it takes to regulate kingmakers like Goldman Sachs.

            World leaders and finance ministers meeting at the G-20 in London asked for more teeth to regulate potentially disastrous U.S. investment policies.  Their ending communiqué offered nothing about reining in investment banks like Goldman Sachs, whose derivative investments caused worldwide markets to tumble.  Though the G-20 vowed to fund the IMF $1 trillion dollars, there was no mention of Russian and China’s plan to replace the U.S. dollar as the world’s reserve currency.  All in all, President Barack Obama did a good job of reassuring nervous investors the U.S. is still the place to invest.  China and Russia wanted a new reserve currency to raise cash by promoting bond sates within their countries.  Despite the current economic mess, the U.S. is still the best place to invest foreign capital.  While the rates are low, there’s no safer place to invest than the U.S.         

            Wall Street came back from the dead just in time to give the economy hope for a late-year recovery.  “We finished a very productive summit that will be, I believe, will be a turning point in our pursuit of global economic recovery,” said Obama concluding the G-20 summit.  Obama takes his cues from his treasury secretary with deep ties to Wall Street.  No one knows for sure whether or not the last three weeks resets a bull market.  “It’s premature to suggest that we’re out of the challenges,” said Richard Hughes, co-president of Portfolio Management Consultants, unwilling to bank on the current gains.  Whether or not you call it “capitulation,” the market turned on a dime, apparently realizing programmed selling was killing the U.S. economy.  Before the cycle repeats itself, Obama and Geithner must look into programmed trading and do something about it.

 About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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