Investment Management Blog - Montague Capital

After two days spent swallowing any old optimistic tosh put in front of it, Wall Street returned its more customary diet of a reality sandwich yesterday.  CY07Q4 GDP growth was revised down from +0.6% to -0.2% and CY08Q1 growth from +1.0% to +0.9%.  But such ancient history was less important than the news that CY08Q2 growth came in at +1.9%, of which 1.5% came from Junior’s package of tax cuts.  In other words, US Inc. is bumping along the bottom and, without another fiscal stimulus, will continue to do so.  “Analysts” had expected more and their disappointment caused Wall Street to fall 1.8%.  At the time of writing the Nikkei is down 2.2%.  Whither Europe when it opens in a few hours?  What was unusual in Wall Street’s behaviour, however, was that no attempt was made to make a silk purse out of a sow’s ear.  Usually a fall in the US Dollar caused by bad economic news would have sent “investors” scrambling for the “safe haven” of oil, but the crude price fell 2.2% on the day to US$124/bbl.  How rare for the commonsense application of the effects of supply and demand to have been applied to this question.  Usually too the hope that interest rates would not have to be raised if the economy is so weak would have the optimists buying in advance of the good news.  Yesterday they were sellers.  There is a common thread here.  Markets may not want to admit it, but the economic picture just isn’t that good.  Fiscal measures are not a one-off, permanent solution, and inflation constrains the use of monetary policy.  It’s time to brace for the pain.  Today’s US non-farm payroll numbers are going to be closely, but nervously, watched.