If I could sum up the financial and economic news of this summer in one word, it would be "tentative." "S&P makes tentative gains." "ECB officials speak tentatively of recovery." "Traders tentative of Fed taper."
The word speaks to the sort of nervous, half-hopeful, half-hesitant feeling about the state of the U.S. - and global - economy.
These weeks mark the five-year anniversary of the most tumultuous time in American finance since the Great Depression. Rewind one more year to 2006, and everything looks fine - a cooling but still scorching housing market, record bank profits and a bullish tear in the stock market all point to confidence.
And then things started to really slow down. First went Bear Stearns, an 85-year old investment bank snatched up for pennies on the dollar. Down goes Merrill. Down goes Lehman. Down go Fannie Mae and Freddie Mac.
Wall Street, the beacon of brash capitalism, appeared on the verge of collapse. But Wall Street's fall did not occur in a vacuum - instead, it sucked down the country's economy into a black hole of debt and default.
With a little - well, if you call a few trillion dollars "little" - help from the Federal Reserve and the American taxpayer, Wall Street seems to be back on track.
But five years later, investors still treat the financial markets with a newfound wariness. From police officers investing in pension plans and 401ks, to hardened hedge fund managers with billions of dollars in assets, no one seems to really believe that the good times are all that good.
We cheer the declining unemployment rate while millions of Americans still cannot find a job. We cheer the stock market when the Fed continues to push forward with $85 billion of bond buying every single month.
The recovery feels unnaturally engineered, bolstered by a government that can barely pay the interest on its own debt. Just like David after the dentist, investors continue to ask themselves: "Is this real life? Is it going to be this way forever?"
According to the Fed, the answer - at least to the second question - is no. The Fed has promised to cut back its bond-buying program in the coming months, though they have yet to set a hard and fast date. I will explain the mechanics of this program in a later column, but for now understand that the Fed essentially buys bonds to raise their price. Rather than "cut back," however, the Fed has chosen to use the word "taper," further highlighting how intensely Wall Street examines the wording of every policy move.
And so this tentativeness continues to permeate the investing philosophy of the world. It's like Wall Street really likes this girl named Recovery. She's incredibly attractive, makes him happy and always manages to find a way to make things work. But Wall Street is nervous and afraid that if he really goes for it, things between him and Recovery will be weird. So, he waits for the right sign. Maybe it's that perfect non-farm payroll number or an amazing Core CPI increase. Eventually he'll make a move, but until then he remains tentative.
Sometime later this year, the Fed will drop Wall Street off for its first day of school. Wall Street will be nervous, likely ill-prepared and filled with awkward excitement. It's been there before - only to drop out and be home schooled by its over-bearing parents for a few years. Whether it can survive on its own, pack its own lunch, make friends and for god's sake stop trading grossly leveraged mortgage-backed securities will take some time to figure out.
Walt Laws-MacDonald is a junior majoring in quantitative economics. He can be reached at Walt.Laws_Macdonald@tufts.edu.
