Reality Is at Odds with Policymakers' Optimism 40 comments
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There is an inexplicable, but somehow widely held, belief that stock market movements are predictive of economic conditions. As such, the current rally in U.S. stock prices has caused many people to conclude that the recession is nearing an end. The widespread optimism is not confined to Wall Street, as even Barack Obama has pointed to the bubbly markets to vindicate his economic policies. However, reality is clearly at odds with these optimistic assumptions.
In the first place, stock markets have been taken by surprise throughout history. In the current cycle, neither the market nor its cheerleaders saw this recession coming, so why should anyone believe that these fonts of wisdom have suddenly become clairvoyant?
According to official government statistics, the current recession began in December of 2007. Two months earlier, in October of that year, the Dow Jones Industrial Average and S&P 500 both hit all-time record highs. Exactly what foresight did this run-up provide? Obviously markets were completely blind-sided by the biggest recession since the Great Depression. In fact, the main reason why the markets sold off so violently in 2008, after the severity of the recession became impossible to ignore, was that it had so completely misread the economy in the preceding years.
Furthermore, throughout most of 2008, even as the economy was contracting, academic economists and stock market strategists were still confident that a recession would be avoided. If they could not even forecast a recession that had already started, how can they possibly predict when it will end? In contrast, on a Fox News appearance on December 31, 2007, I endured the gibes of optimistic co-panelists when I clearly proclaimed that a recession was underway.
Rising U.S. stock prices – particularly following a 50% decline – mean nothing regarding the health of the U.S. economy or the prospects for a recovery. In fact, relative to the meteoric rise of foreign stock markets over the past six months, U.S. stocks are standing still. If anything, it is the strength in overseas markets that is dragging U.S. stocks along for the ride.
In late 2008 and early 2009, the “experts” proclaimed that a strengthening U.S. dollar and the relative outperformance of U.S. stocks during the worldwide market sell-off meant that the U.S. would lead the global recovery. At the time, they argued that since we were the first economy to go into recession, we would be the first to come out. They claimed that as bad as things were domestically, they were even worse internationally, and that the bold and “stimulative” actions of our policymakers would lead to a far better outcome here than the much more “timid” responses pursued by other leading industrial economies.
At the time, I dismissed these claims as nonsensical. The data are once again proving my case. The brief period of relative outperformance by U.S. stocks in late 2008 has come to an end, and, after rising for most of last year, the dollar has resumed its long-term descent. If the U.S. economy really were improving, the dollar would be strengthening – not weakening. The economic data would also show greater improvement at home than abroad. Instead, foreign stocks have resumed the meteoric rise that has characterized their past decade. The rebound in global stocks reflects the global economic train decoupling from the American caboose, which the “experts” said was impossible.
Though the worst of the global financial crisis may have passed, the real impact of the much more fundamental U.S. economic crisis has yet to be fully felt. For America, genuine recovery will not begin until current government policies are mitigated. Most urgently, we need a Fed chairman willing to administer the tough love that our economy so badly needs. That fact that Ben Bernanke remains so popular both on Wall Street and Capital Hill is indicative of just how badly he has handled his job.
Contrast Bernanke’s popularity to the contempt that many had for Fed Chairman Paul Volcker in the early days of Ronald Reagan’s first term. There were numerous bills and congressional resolutions demanding his impeachment, and even conservative congressman Jack Kemp called for Volcker to resign. Had it not been for the unconditional support of a very popular president, efforts to oust Volcker likely would have succeeded. Though he was widely vilified initially, he eventually won near unanimous praise for his courageous economic stewardship, which eventually broke the back of inflation, restored confidence in the dollar, and set the stage for a vibrant recovery. Conversely, Bernanke’s reputation will be shattered as history reveals the full extent of his incompetence and cowardice.
As congress and the president consider the best policies to right our economic ship, it is my hope that they will pursue a strategy first developed by Seinfeld character George Costanza. After wisely recognizing that every instinct he had up unto that point had ended in failure, George decided that to be successful, he had to do the exact opposite of whatever his instincts told him. I suggest our policymakers give this approach a try.
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Congrats to those selling. My regards to those buying.
<<Obviously, markets were completely blind-sided by the biggest recession since the Great Depression.>>
The markets are no single 'read' on where the economy is going. You have to consider the makeup of the market participants being different at different times. One simple dichotomy is that the stock market is made up of both "dumb money" and "smart money". Smart money began to have an inkling of the debt meltdown long before the peak in 2007, but foolish money being piled into stock funds drove the markets higher anyway. The question is, who thinks the S&P500 is a buy now at 1000 -- the smart or dumb? -- I say lots of buyers today are of the smart variety. They know of the recession that "This too shall pass." There still are hurdles, such as many option ARM resets to come, but I think it is smart money that is betting now that the US economy will not wither and die.
<<if the U.S. economy really were improving, the dollar would be strengthening – not weakening.>>
It's definitely not that simple. A currency can 'decouple' from its underlying economy without correlation. Case in point: Japan. The yen has been strong for years, yet at same time the Japanese economy has been in the doldrums.
a given month. When the poor does not crack its fingers for five dollars and
the rich for five thousand. When needs are fulfilled without taking you broken.
When we stop thinking that Daddy Government has to solve our problems just
because we pay taxes. When we stop thinking that we own a home just because
we did put -in a down payment. When we Government and Sheeple have not
debts. HUH HUH!! Do you believe in the Zodiac? watch the effects of the aproach
of Mars to Earth will do into the economy next Aug.the 28th.
Consider this quotation of a man who once wielded immense political power for many years in the 1900's: “If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.”
Although parts of this quotation may sound a bit extreme, much of it seems to fit the current news (pablum?) flow to a tee. Oh by the way, the quotation is from Joseph Goebbels... Have a nice day and watch what you post!
The Federal Reserve is the policy arm of the big banks and brokerage houses. Period. Ostensibly, its mandate is to maintain "price stability and full employment". Right. Anyone notice how many jobs the Fed has created lately? How about the dollar? Is it really supposed to zig-zag like it has been for the last decade? The central task of the Fed is to shift wealth from one class to another. And it succeeds at that task admirably. The Fed's "mandate" is public relations claptrap. Bernanke hasn't lifted a finger for homeowners, consumers or ordinary working stiffs. "Yer on yer own. Just don't expect a handout. That's socialism!" All the doe is flowing upwards...according to plan. The Fed is a social engineering agency designed to serve as the de facto government behind the smokescreen of democratic institutions. Did you really think Obama was calling the shots?
The only alternative to tyranny and slavery in America is to SHED the FED and recover our gold looted by the cartel families.
However, using basic common sense - how is an economy where we borrow money to consume depreciating assets sustainable? Just because we make the GDP number go up, politicians and the masses of financially ignorant public think we are doing well. Instead of manipulating the model (GDP is going up because we are increasing government spending, unemployment is going down because people have run out of unemployment benefits, they stopped looking for jobs, etc), we should return to common sense. We can't con the Chinese to pay us (buy our treasuries), to work for us (for $1/day making our our clothes, toys, gadgets, etc), and to ship all their goods to us. They are giving up all their wealth for American IOUs - US Treasuries.
The Chinese has been obsessed with these models too, they are getting growth by working for the US, they are improving their unemployment by working for the US, and they are increases their balance sheet buy adding more US Treasuries. By the models, they are doing extremely well, however many of their citizens are still poor. Someday they will wake up to common sense and decide that these models that measure how well a country is doing is flawed and that simply keeping the goods they produce is better than giving it to the Americans.
A lot of people say, the Chinese has to keep buying US Treasuries, because who will they sell their goods to? Think about this a little bit... what do they get by selling stuff to the US? Nothing! Some IOU piece of paper. Sure their "growth" will slow if they don't prop us up, but the "growth" model is flawed. China isn't better off holding all these IOUs, their people certainly do not feel richer, some number in the books is just bigger, and that number will never be converted to real value.
I suspect that this fall is going to look a lot like last fall, I can't quantify it in a technical sense, I just can't understand what fundamentals would justify any other outcome?
On Aug 09 06:01 PM kinky wrote:
> I will believe the economy is improving when no one single soul lose
> its job in
> a given month. When the poor does not crack its fingers for five
> dollars and
> the rich for five thousand. When needs are fulfilled without taking
> you broken.
> When we stop thinking that Daddy Government has to solve our problems
> just
> because we pay taxes. When we stop thinking that we own a home just
> because
> we did put -in a down payment. When we Government and Sheeple have
> not
> debts. HUH HUH!! Do you believe in the Zodiac? watch the effects
> of the aproach
> of Mars to Earth will do into the economy next Aug.the 28th.
Various theories attempt to understand this complex set of behaviors, from Marxism, Keynesianism and Institutionalism to Austrian School economics, Monetarism and free-market anarchism.
Market valuations are the result of the activities of many disparate (and too often desperate) groups of human beings who are loosely called traders, investors, financial advisers, economists, accountants, etc. The businesses that they attempt to place a value on, represent another.
Businesses are at least as complex as the human institutions that analyze them and very difficult to understand.
Why is Coca-Cola such a successful company? Why is Intel so much more successful than Advanced Micro Devices? Why is Microsoft so many times bigger than Apple even though most analysts think Apple produces a better computer? Why do cigarette companies continue to do well? Why do people continue to buy SUV’s? Why can’t alternative energy companies be successful …..?
I hope things aren’t so confusing that that you aren't advising us to fall back on The Seinfeld School of Television Economics. I’ve already had enough of Larry Kudlow, Screaming Jim Cramer and all the other TV gurus.
I have another suggestion. I suggest that we return to some of those long neglected classics of economics and sociology instead. I don’t have to list them. We all know them because we pass by them on our bookshelves every time we walk over to the computer or sit down to watch the tube.
China pours billions into stockpiling industrial metals: of course imports go up. Exports aren't going up. Now, once the stockpiling ends, imports go down again.
This is GLOBAL DEFLATION. Every government in the world wants the party to go on. They are afraid what the non-party brings.
American consumption has been the ENGINE of the party. If the engine falters, the ENTIRE train stops.
On Aug 09 08:37 AM Mark Bern wrote:
> Once again, a good article by Mr. Schiff. However, at great risk
> I take issue with one point made by the author.
>
> "The rebound in global stocks reflects the global economic train
> decoupling from the American caboose, which the “experts” said was
> impossible."
>
> I really don't think that the global economic train has decoupled
> from America yet and I don't believe that we are the caboose. This
> isn't nationalism talking. The current growth in China, for example,
> is due primarily to their huge stimulus package that is actually
> being spent on large multi-year infrastructure projects and easing
> lending for capital formation. Their stimulus is much larger than
> what is beginning to be deployed in the US relative to GDP. A goodly
> portion of their stimulus is aimed at making their industries more
> efficient to become even more competitive. But, when the current
> Chinese stimulus package runs out, they will still need consumers
> in the US and Europe to restart their spending habits of the past
> couple decades in order to keep their growth engine going. Exports
> may account for only 20% of China's economy but the surpluses it
> creates also funds much of the investment in domestic infrastructure
> and growth.
>
> American consumers are unlikely to resume their hedonistic borrow
> and buy habits anytime soon. We have been the enhine that pulled
> the global economy along its upwardly spiraling growth curve. With
> this significant change, I believe America will more resemble a caboose
> in the future. But the world is anxiously awaiting our return.
> This time, they'll just have to keep waiting. So, in the end, I
> think that is the US that is decoupling and forfieting its role in
> global trade. As we make our adjustments, the world will just have
> to deal with it.
.
The stockmarket investors or speculators buy because they expect that the market will go up and they sell when they expect it will go down. There is a correlation between economic news and the expectation of market movement ... but the correlation is not very reliable, especially when there are changes in the fundamentals of society.
There would be a much better link between the real economy and the capital markets if the metrics about the real economy and the socio-economic situation in every community was on the record as broadly and as easily as corporate profit performance ... and if the reporting of corporate performance had a value dimension as well as just a money profit dimension.
The rules about corporate profit reporting that has allowed huge issues like unfunded pension and healthcare liabilities to be ignored are a disgrace and should be changed. In addition corporate profit reporting should take into account the value impact on society when profits are arising by reducing or relocating the labor force and the purchasing of business inputs.
What gets measured gets done ... social impact as well as profit needs to be measured and reported on.