As an opening aside, let me fess up that I'm not an economist or financier, just an amateur personal investor who has paid a lot of attention to financial markets for 15 years and has done a lot of historical reading. What follows is a "devil's advocate" counterpoint to recent diaries of others which might have suggested doom.
And it sure seemed that way to me until Friday. Lord knows, I'm a democrat and I think the economic policies of this administration have shown that the "personal responsibility" society is in fact the socially darwinian "every man for himself" society. And the
"bursting housing bubble, bankruptcy 'reform', overspending government and consumer" implosion scenario makes a lot of sense to me. But this is a reality based community and I have to put aside my own ideology when confronted with contrary facts.
Last week the economy gave out a host of negative signs, from soaring inflation to plummeting consumer confidence, to weaker than expected spending and employment. And yet on Thursday the market turned around and went up and stayed up on Friday in the face of more bad news. As I posted in a comment Friday, I wondered what the market knew that I didn't. On Saturday I picked up my copy of Barron's and got an answer, by way of a few statistics and an interview with Jim Paulsen of Wells Capital Management which I
summarize below.
Consumer inflation is now at 4.7% year over year, the worst since 1990. But after 11 Fed rate hikes, the overnight rate for money is 3.75% This means that the Fed is still chasing inflation. In other words, money is even now being given away at nearly a 1% discount. Far from being a drag on the economy, that's expansionary and inflationary. In fact, notes Paulsen, the entire US Treasury yield curve, all the way up through the 30 year bond, could be (and as of Friday, is now) paying less than the inflation rate. Even if mortgage rates were to hit 6%, that's only 1.25% over inflation, so consumer mortgage refinancing can continue for at least a while. And, while most of us consumers (that's just about everybody on this board) may be hurting due to stingy wage increases, corporations are in fact more flush with cash than they've ever been. True, that's a horrible internal imbalance in the US (and a good reason to be a democrat) but suggests that US corporations, wired into the global economy powered increasingly by China, India, and once again Japan, are doing just fine in the near term, thank you.
All of this is supported by the a sudden increase in corporate insider's buying of their own stocks (small compared with selling but still quite notable) and wall street trader activity more bullish than individual investors and general investor and econo-pundit sentiment than it has been in several years. Even oil, which just about everyone seems to think is headed to $100/barrel, as usual is at least temporarily confounding the consensus and decreasing in price (several days ago, I actually paid less for gas than I did pre-Katrina).
Keep in mind that, by the time an economic story is all over the blogoshpere and in the MSM, it has probably already been taken into account ("discounted") by the market (think of the Time story on the housing boom a couple of months ago, or the Economist's cover on the "disappearing dollar" last January, right at the dollar's bottom).
In short, a combination of still-cheap money and a sharp divergence of smart money vs. small investor sentiment argues that whatever most consumers might think, the market is saying that the economy as a whole isn't doomed yet.
