During a recent meeting with a CFO the other day, we gravitated to the topic of the financial system and what needs to be done to fix it. Seeing that I was listening to a highly quantitative and analytically oriented CFO, I expected a "Greenspan-esque" discussion of capital ratios and esoteric analysis of mark-to market accounting, but instead we talked about the stock market and the psychology of the markets.
He went on the say that he really didn't see a clear solution of how to fix the financial system or how best to deal with the toxic assets, but he did say that the flow of credit was the key. I asked him if he had any difficulty funding his business and whether he was satisfied with his banking relationships, and he said, "We've actually reduced our outstanding debt and my lead bank has made it clear they'll give us the credit line we may need in the future." Of course, he wasn't asking his bank for credit today, but he was primarily expressing the need for others to get credit more easily. We then discussed the fact that most CFOs and individuals are de-leveraging if they can, and that it's really the marginal credits who can't get the loans.
Isn't that what's supposed to happen? Wasn't it the easy availability to credit that got us into this mess? In any event, he thought that the most important factor to consider in getting credit flowing again is consumer confidence. And guess what he thought was the most important factor impacting consumer confidence - that’s right - the stock market. "By the way, how is the market doing today?" I think we can all relate to that. Don't we feel more confident when the market goes up 300 points one day and another 250 points a couple of days later like it did this week? Don’t we all feel like we shouldn't be so worried; that everything will be alright; especially when the market does well? And then during those weeks when the market went down 10% in a single week, haven't we wondered just how low can it go and could we be completely wiped out?
The CFO went on to say, "I really don't care what Geithner does as long as he does something and the markets like it. When the markets come back, consumer confidence will come back; and so will spending and the flow of credit. All we really need is a few good days and weeks in the market and then everything will begin to turnaround."
Wow! Thank goodness it's all just based on how the Dow does today. The market went up almost 10% this week…everything must be OK now.
Are we too focused on the market? Is it really just about our portfolios and consumer confidence? Let us know what you think.
