Bonfire of the Insanities
Tom Wolfe gave us the Bonfire of the Vanities. But given the increasingly erratic and see-saw action of the stock market, a more apt title for the current Wall Street scene might be Bonfire of the Insanities.
Clearly, the market's virtually daily fast and furious up and down moves are enough to drive anyone bonkers. For example, in the week before last the Dow Industrials skidded a wicked 262 points in 2 trading sessions. Then down again another 172 points this past Monday, followed by a string of 4 straight winning sessions in which the Dow rocketed more than 470 points.
Granted, volatility is a way of life in the stock market, but the swelling extent of it, as well as the conspicuous reappearance of hefty daily market declines, is somewhat surprising. Why so? Because virtually all of the so-called experts are telling us unequivocally that there's now a brighter light at the end of the economic tunnel, which should help stabilize the stock market and cut down on the volatility. Obviously, the believers that the economic drought is behind us are numerous in number, given the continuing upswing in stock prices, which have surged about 50% from their March lows.
This past week saw another dose of happy economic talk, with Goldman Sachs declaring the recession is over, J.P. Morgan Chase assuring us that the housing crisis is just about kaput and Warren Buffett telling us the economy is on a slow road to recovery.
Even the media joined the bullish brigade over the weekend, with the New York Times declaring the economic rebound may have begun and CNN telling us most of the housing damage may have been done.
Sounds wonderful, but before jumping for joy, some Wall Street pros say a healthy dose of skepticism is surely merited since we've been repeatedly bombarded by such cheerful and erroneous chatter for at least the past six months. What's more, there are a number of dark, worrisome economic signs lurking out there that seem irrelevant to the sunshine crowd. Among them, job losses, jobless claims and foreclosures are all on the rise, while 6 million people are living on unemployment benefits and consumer confidence and spending continues to deteriorate.
Moreover, while we've seen some better numbers on the housing front, such as a 7.2% jump in July's existing home sales, there's no escaping the grim side--namely that 13% of the nation's roughly 41 million home mortgages are delinquent, growing number of mortgages are under water and more than a million foreclosed and abandoned houses are eagerly looking for buyers.
Further, economists galore, as well as the White House, have warned us again and again that the recovery will be slow and painful.
Speaking of a painful recovery, not just pain--but an awful lot of it--is what's envisioned by Bud Conrad, the chief economist of Casey Research, an economic and investment consulting service headquartered in Stowe, Vt. His basic view of the renewed euphoric wave suddenly sweeping the financial markets, largely reflecting a sunnier outlook for both the economy and the stock market: It's way too soon to pop the cork!
Why so? Because he sees a miserable 2010, characterized by sluggish economic growth, growing job losses, hundreds of bank failures and many more foreclosures. "We're in for very difficult times," he says.
Numerous economists are predicting a spirited economic rebound next year, with GDP growth estimates of 3% to 3.25% pretty conspicuous. Conrad reckons that's much too optimistic. His outlook: growth of 2% or less, with the unemployment rate (now 9.4%) ballooning to 11% to 12% by year-end 2010.
Conrad puts himself in the camp of two of the most notorious economic bears -- New York University's economic professor Nouriel Roubini and global money manager Jim Rogers. Both Conrad and Rogers were in the same class at Yale. With mounting evidence of better days ahead for both the economy and the stock market, many bears have toned down their negative comments and are running for cover. Conrad is not among them.
In effect, he tells me, the economic recovery will take longer than most people expect, which he attributes to the fact the U.S. is no longer competitive on a world-wide basis. "Our own corporations," he says, "have taken advantage of cheap Asian labor, resulting in the destruction of our own working and middle class. That means there are no new jobs." Without jobs, Conrad says, our economy will not grow because consumers can not afford to spend.
He also points out that we have extended the last bubble by encouraging way too much debt. "That debt," he observes, "is now a deadweight anchor, we are far from being expunged from its grasp and it will take a long time to unwind."
The national debt currently stands at $11.7 trillion or $38,130 per citizen.
The economy, as he sees it, is still a deep mess. "There are some little bitty green shoots around, but we're still burdened by plenty of brown weeds," Conrad says
How does it all relate to the stock market? "To me," Conrad responds, "the market is living in Shangri-La."
Write Dan Dorfman at Dandordan@aol.com
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We just lent 24T$ to the very banksters who crashed the economy. The Wold GDP is only 70T$.
Main Street got .8T$ over TEN years.
The Bankster who caused the crash have taken bonuses large enough to pay OFF the "toxic" loans.
Do you begin to realize how the bankster have taken us?
See my profile for complete background and links on the economy.
quoting this blog: "...there are no new jobs." Without jobs, Conrad says, our economy will not grow because consumers can not afford to spend.
Didn't expect to read this kind of thing on Huffpost. Did anyone call him a conspiracy theorist or a class warfare agitator, or a pessimism pornographer?
i see your friend at, "an economic and investment consulting service headquartered in Stowe, Vt. " prefers skiing to a daliy commute into Manhattan.
Not to encourage carelessness but if you had listened to the bears at the bottom of the market then you would still be down 50% +, eh?
Cheers!
If you'd listened to Roubini from the start, you'd be farther ahead than that!
aaahh....this is the old get the suckers reinvested and pull the rug out.
folks, be very careful if you decide to go long the equity market right now. be very careful.
my disclosure: 80% short broad market and financial sector, 20% cash, with an itchy finger to go to 100% short.
An interesting question I would like to ask.
Many nations have a national debt in excess of their GDP, which is to say it would take more than a year of every iota of production paid to the debt to expunge it. The US has a lower debt to GDP ratio, which is pointed at by many on both sides of the isle to explain why our national debt isn't that bad.
But most companies look at the debt to revenue when factoring how repayable a debt is, not debt to customer assets. The US has a much lower revenue as a percentage of GDP than those other nations have, which means that our sustainable debt ratio is lower. This is especially true if you look only at the general fund budget (excluding Social Security, Medicare, etc. which are paid by their own dedicated taxes). Our debt is about 10 times our revenue right now. Would you invest in that company?
Fortunatly for us, the solution is obvious and elegant. Increasing tax revenues will reduce the debt (the numerator) and increase revenues (the denominator), improving both sides of the calculation. Indeed, the expiration of the Bush tax cuts may be one element making us currently somewhat credit-worthy.
inflation is the way these problems have always been solved. the problem with the inflation solution has always been the spendthrift nature of .govs thwarting the solution with ramped up spending.
the end result, in extreme cases(this may be one), is the debasement and ultimate destruction of the currency marked by hyperinflation.
the simple fact is that the amount of credit available withdrawn from the market that can't return to the market will take years to deleverage and build up again. china and india are not burdened with this problem. they can grow.
this deleveraging is also giving reason for the rest of the world to abandon the dollar. this also creates a drag on the growth of the usa economy. the fed appears to be withdrawing the punchbowl because of this pressure but will not be able to avoid a massive dollar devaluation and inflation.
The Saudi's and Kuwaiti's are already raising production. In June the Suadi's raised production by 144,000 bpd, the Kuwaiti's doubled that b 300,000 bpd, as oil touched $68 p/b (Bloomberg 8/21). The reason: they also see the dangers of $100 barrels once again collapsing the world economy. My guess, they'll try to keep oil in a trading band between $75-$85. Beyond that, kiss the recovery goodbye.
"To me," Conrad responds, "the market is living in Shangri-La."
Apparently, that's not the first time that has happened:
http://www.gold-eagle.com/editorials_01/seymour062001.html
(#20 takes the cake).
Conrad is a goldbug, and is still urging everyone to put their money on gold, which has gone nowhere, while the stock market is up fifty percent, and oil up one hundred percent from its low. It's also wrong to think of him in similar terms as Roubini, their views have little in common. For one, Roubini sees the recession coming to an ending by years end, altho he sees dangers from rising employment and a weak recovery. Conrad is still peddling the fear message of an oncoming depression that Roubini believes government action has helped to avoid.
gold has gone nowhere..exactly. gold is still gold. the stock market is up fifty percent based on the dollar which the Fed has doubled the amount of in about a year. You keep collecting those dollars, your gonna need something to start a fire with in the near future.
Ad hominem arguments are a logical fallacy.
The world economy will bust if the United States does not implement real economy formation.
Can we finally put to rest that adage that what's good for Wall Street is good for Main Street?
Can we finally put to rest that the stock market has ANYthing to do with the United States other than being housed on our soil - it is multi-national corporations with their own shadow global-oriented government.
Can we just call it a oligarcy based on gambling-much like a saloon in the old west and get it over with?
Now, can we change economic models?
Onward!
The oil prices are being dragged upward again by Goldman Sachs, they guys who
hiked up those oil prices during Bush-Cheney administration. Their policies finally
crashed the economy, a domino effect.
US Taxpayers BAILED OUT Goldman Sachs. They TOOK THE BILLIONS AND RAN.
Now they're back BILKING THE AMERICAN PUBLIC all over again!
Gee, "thanks", Goldman Sachs. NOT. not.
Yes, "the war on drugs" and The Prohibition = ENRICHING THE CROOKS.
It is in the interest of drug cartel bosses and their shills to continue the war on drugs.
It's a constant shoveling out of your tax dollars to PROFITEERS in this ridiculous "war".
We cannot afford to be THAT STUPID anymore. It's too expensive to keep paying for
the cartels' profiteering! End the insane, UNAFFORDABLE "war on drugs".
A sluggish recovery in the second year of the presidential term is very bullish. As the Repugs were saying in January, the market was "forecasting" Obama's imminent failure. It's a leading not a trailing indicator. Of course, now they're quiet after a 50% rebound in his first 6 months. We still need to pump up job creation in this country. Government funded infrastructure projects, which are two generations overdue, is just the ticket to get money (and tax revenue) flowing. Curbing the ugly monster of double CPI health care spending is another task worthy of top priority, and it only can be achieved once everyone is covered. Finally, about that debt... Along with the Iraq War it is Bush's ugliest legacy.
As the economy rebounds we will need a gradual shift towards reducing deficits. In the long run we need a serious conversation about defense spending. Ours equals the rest of the world combined with no justification whatsoever. We also need to abandon the idiotic War on Drugs. Ultimately we need a sober analysis of the entitlements programs, Medicare and Social Security. (Medicare in particular). If we were to shift our obscene defense spending to that of say France and we would shift from regressive payroll taxes to the income tax those future liabilities would melt away. If we don't our kids and grandkids will be left holding the bag.
Excellent analysis.
Concise summary of the direction we need to travel.
I would add that becoming a net exporter of energy would be the ticket to sustained growth and job creation. Harvesting the sun, rather than raping the earth for diminishing resources would also be a moral choice.
Who would you sell that energy to who can't also avail themselves of solar energy without having to import it? Mexico? Canada? Those countries surround you and are net exporters of energy, which means you need to at least stop importing for starters. Then you need to get a grip on your country's debt to avoid hyperinflation. Hmmm, it's going to be a long dark recovery. Lots of infrastructure work is needed, why not start there.
How can the U.S. economy recover any time soon with oil prices being dragged upward by the already-rebounding China, India, Hong Kong, France, Germany and others? U.S. businesses won't be able to compete if they are hamstrung by high fuel costs. We seem to be turning into aThird World country, with a super-wealthy upper class and a rapidly expanding lower class that is struggling to surivive. Obama's stimulus plan is a life support system for government agencies and the rest of the establishment, but the great American working class is headed off a cliff.
This is dead on. If / as the US economy begins to recover, along with the rest of the world's, oil prices will shoot up again, providing instant negative feedback. This isn't mentioned by Dorfman or his friends.
What it means is that we're stuck here for a very long time. Little real growth, little real job growth. I'm guessing high inflation too, because that will be the only solution to paying off those trillions in debt.
I don't think we're headed to Third World yet--that's 50 years down the line. But pretty soon something like eastern Europe.
Agreed, David. Phantom wealth always runs to ground -- land and its products. Capitalists are taking their newly-minted phantom trillions to speculate on land and resources (oil, gold, water, etc.) The 40-50 trillion in speculative, digital wealth the derivatives trade conjured out of thin air has no place to go but into oil and real estate and food futures. We live in a sad, dangerous era in which the rich are trying to buy every last piece of ground and mineral rights in perpetuity for every country across the globe. This can have no result but to inflate the rest of us completely off the board. Anyone thinking corporate consumerism can "recover" and grow from here without massive social realignments, which might or might not include re-conceiving money, ending private property in land, banning speculation, guaranteeing employment, health care, food, land and water for all, etc., lives in a world of pink clouds and laughing gas.
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