Axing economic growth

Bernie McSherry Contributor
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Today marks the 150th birthday of Lizzie Borden, the Massachusetts spinster who was accused of brutally murdering her father and stepmother with a hatchet on August 4, 1892. Lizzie’s fame soared during the nationally publicized courtroom drama, the O.J. Simpson trial of its day. Despite incriminating circumstances and inconsistent testimony from the accused, the prosecutors were hampered by their failure to incontrovertibly produce a murder weapon or blood evidence tying Lizzie to the crime, and she was acquitted after only an hour and a half of jury deliberations.  Amid widespread public belief in her guilt, Lizzie went on to become an American Folklore legend, her notoriety sealed by the children’s rhyme coined by an anonymous newspaper reporter:

Lizzie Borden took an axe
And gave her mother forty whacks
When she saw what she had done
She gave her father forty-one.

The stock market got whacked last Friday, primarily due to fears of the impact of financial regulatory reform on bank profits. This week, despite the prospect of strong corporate earnings, the indexes remain trapped in a trading range, partially due to investor concerns that pending government actions are going to take a blunt axe to global economic growth. EU countries appear determined to chop spending while simultaneously taking a bigger slice of taxpayer paychecks, and the American political climate has shifted markedly in favor of the deficit hawks. If governments on either side of the Atlantic go through with their stated intention to reduce deficit spending, (and it must be admitted that it’s far from certain that they will) the drag on economic growth is likely to be considerable. Fears of economic contraction continue to grow, and after two years of pundit histrionics over the inevitable return of severe inflationary pressures, public gaze has begun to shift towards the truly frightening prospect of deflation. Macroeconomic headwinds are clearly eroding investor confidence.

That confidence was in recovery mode as the Eurozone debt crisis receded from front pages worldwide, but the European bank stress tests are creating anxiety for some investors. The jury is still out on the results, which are expected at the end of the week, and while observers will be watching closely to see what kind of haircuts are taken for holdings of sovereign debt, it seems highly unlikely that any major banks will be wind up on the chopping block. The muted reaction of European markets in recent sessions is evidence that the whisper numbers are benign and unfortunately, that leaves the potential for downside pressure should those tests unexpectedly reveal serious problems.

In light of those worries, this week’s earnings reports will have to be spectacular to move the market significantly higher. Investors are aware that corporate managers have cut expenses to the bone, and they remain haunted by a lack of topline revenue growth. With trillions in cash still on the sidelines, it is clear that corporate managers and individual investors generally lack faith that the hoped-for recovery will materialize in the near future. Potential rallies will require a significant infusion of those hoarded piles of cash if they are to stand a ghost of a chance at success.

It is said that ghosts inhabit the site of the Borden murders in Fall River, Massachusetts, named by the Travel Channel as the scariest place on earth. In recent years, the Borden home has been turned into a bed and breakfast, allowing those with a taste for the macabre to spend a night communing with the spirits of those involved in the terrible events of that long ago day. Fascination with the Borden murders remains high and Lizzie herself still looms large in American popular culture. Her notoriety has spawned dozens of books, dramas, television shows, and even a musical engagingly entitled “Lizzie Borden: A Musical Tragedy in Two Axe”. Rather than fading into the mists of history, that steady stream of media attention has ensured that more than a century after their bloody occurrence, the murders themselves remain America’s most famous hatchet job.

Bernie McSherry is senior vice president for strategic initiatives at Cuttone & Company.