Grandma Knows Best

Hope springs eternal, Alexander Pope wrote. And hope indeed turned into bold, delightful reality this past week, treating the nation's more than 80 million beleaguered stock investors to a wing-ding of a five-day winning streak during which the Dow Jones Industrials racked up a rousing 597-point gain. It was the biggest weekly advance of the year.

No question about it. This giant sprint is largely predicated on a rapidly swelling view that the beaten-up economy is out of the woods.

Such a rosy outlook -- coming as it does in an economic environment rife with considerable risk -- conjured up memories of my grandmother, a pretty sharp and perceptive lady. When I was in my teens, she told me if I ever hear or read something that doesn't seem to make any sense, think twice about it because maybe it's just not true.

With that thought in mind, I decided to rattle off what some pretty savvy people tell me is a slew of economic absurdities coming from Wall Street, the media and Washington that a number of folks currently accept as the gospel and which grandma might very likely shake her head at in disbelief and challenge. Chief among them (coupled with reactions to each):

-- The economic decay is over and the next few months will produce undeniable evidence of a significant economic recovery. Even the most notorious gloomy Gus, New York University's economics professor, Nouriel Roubini, is predicting the recession will end before year-end.

This past week saw a number of telling signs indicating such a trend. Noteworthy was a rise in June home construction to the highest level in 7 months; a reduction by the Federal Reserve in its projected 2009 GDP decline; an easing of delinquencies at such credit card biggies as American Express and Capital One Financial; slightly better than expected June retail sales; slowing production cutbacks at industrial companies, and higher than anticipated earnings at a bunch of corporate bigwigs, such as Goldman Sachs, Intel and JPMorgan Chase.

Sounds good, but try spinning that yarn about an improving economy to the nearly 15 million unemployed workers, the additional 522,000 people who applied last month for jobless benefits, the owners of 2 million foreclosed or abandoned homes who can no longer meet their mortgage payments or the swelling number of Americans who are foregoing needed drugs and doctor visits because they can no longer afford them. They'll ridicule your sunny economic view and tell you flat out that you're out of your mind.

-- Signs of an improving economy and renewed vigor in the stock market should help spur a sizeable increase in consumer spending.

What nonsense! Unless you're referring to the likes of Warren Buffett or Bill Gates, the consumer's financial muscle has turned flabby. Aside from growing unemployment woes, the wicked loss of nearly $14 trillion in household wealth over the past 2 years, chiefly reflecting hefty declines in home values and stock portfolios, strongly augurs against any renewed consumer spending outburst.

A leap in the savings rate to 6.9%, the highest in 15 years, and skidding public confidence because of an unfavorable view of business conditions, also suggest a solid and imminent rebound in consumer spending that is probably as certain as one of those sure-fire guarantees from Mickey or Minnie Mouse. Clearly, the savings surge is an unmistakable sign the consumer is pulling in his horns and is trying to repair his debt-ridden balance sheet.

-- The Obama administration has amassed a team of top flight economic and financial brains that are concocting decisive actions to lead us out of the recession and get the economy percolating again; its creation of a $787 billion stimulus package, enacted last February, is a case in point.

Sounds promising, except the stimulus has failed to stimulate. Evidence of this failure: the growing number of jobs going down the drain (467,000 in June, boosting the unemployment rate to a 26-year high of 9.5%), falling wages and income, shrinking consumer spending, skidding consumer confidence and talk of a second stimulus package, or maybe even a third, if number two doesn't work.

-- Since money moves the market, the Federal Reserve is certain to print as much new green as needed to invigorate the floundering economy. And, as investors well know, you don't fight the Fed.

True, but there's a price to pay for speeding up the presses -- higher inflation down the pike, an even bigger budget deficit (pegged at about $2 trillion in the current fiscal year) and deteriorating confidence in the greenback, which is already experiencing growing international worry. For example, Asian countries, notably China, and likewise Russia, are among those pushing to replace the U.S. dollar as the reserve currency.

-- The price of oil, which plummeted from last July's high of $147.24 a barrel and is currently trading around $60, is headed a lot higher, likely above $85 before year-end and more than $100 in 2010.

No one, of course, really knows, but current facts scream otherwise. Among them: an oil glut; the global economy is not doing well, which means reduced demand; increased regulation and production limits set by the Commodities Futures Trading Commission, and an abundance of supply to weather any geopolitical turmoil out of the Middle East, Venezuela or Nigeria. Oppenheimer & Co.'s well regarded energy industry tracker Fadel Gheit tells me that oil, based on fundamentals, is worth no more than about $45 a barrel. If such a price were to take hold, that would knock down gas at the pump to below $1.20 a gallon.

The bottom line, as my grandma might well warn you: Don't let anyone sell you the Brooklyn Bridge.

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Comments

[steppenwolfsayshi]

I've been listening a lot more to my grandparents lately too. She survived the Great Depression by living in the basement of another person's house with 5 other children. They were poor immigrants with no assets and went hungry a lot. My grandfathers family used to own the largest cattle farm in the state before they lost it in the Depression through stock losses. My other grandmother is younger. She was a child during WWII. They had plenty of money, but her father sold their house and then wasn't able to buy another because of the ecomony. She said that the war caused the housing market to freeze up, so her family had to live with different families throughout the war-some of them nice, some of them not.
What they learned from their experiences is that taking risks with finances is a lot more risky than it might seem. Save your money. Don't spend anything you don't have, not to buy houses, stocks or anything that's not necessary.

[drkazmd65]

Your Grandma would have been pretty much in agreement with my Grandma,... RIP Grandma - I miss you old lady.

She and my Grandpa survived the Great Depression, managed to prosper and raise two kids through the 1930s-1950s, and saved like there was no tomorrow their whole adult lives. The reused, repaired, and recycled things long before it was trendy, and always had a productive home garden. We were eating home-grown frozen green beens and Grandpa's pickles until the following spring each year.

I wish I still had the both of them around (Grandpa died 1981, Grandma 2007). I'm sure they would have had plenty useful to tell us now.

[jason77]

There's a 'green shoots' version of Dan's posting, so is it more than a matter of glass half full - or half empty?

The issue is not about predicting what is going to happen. That pretends we have no hand in making our future. Yes, as Keynes and FDR reminded us, if we all get optimistic that will help - but all means a lot, including many outside the US, because we're all in this one together - unlike the recessions of the 80s and 90s which were domestic.

This global recession/­depression is not simply about absent optimism - the will to go out and buy something, as Bush urged.

We are in this because over the last 20 years we conspired to unpick the fabric of social and legal controls that grew up - quite slowly - after the US Trusts got busted and the legal arrangements of the pre-Depression 20s were brought to heel.

Many pundits are pointing out that Goldman Sachs, as a leading player, is back to its old tricks - heads we win, tails you lose. Most everyone is trying to get back to 'the good old days' of the 90s that brought the economy to its knees.

This is the issue. Where are the political, legal and social changes (including to our spending and savings habits) that must happen if we are to avoid slamming into the ditch on the other side of this wobbly road?

[WASanford]

What's a supply sider to do? All anyone is talking about now is demand, but how did anyone avoid noticing that it is demand that drives supply as noted by Adam Smith some time ago? Some folks believe that demand can be manufactured via advertising but they are wrong. As my dear old daddy used to say "you can't get blood out of a turnip" and right now all we have are turnips. That means no blood and an economy that is dying because it is cash starved.

How do we remedy this? Credit won't do because debt needs to be serviced by the debtor and without gainful employment that's not likely to happen. I believe that Congress should exercise its power to "coin" money. Sure if the paradigm shifts again a growing money supply will prove to be inflationary but there are ways to deal with that. Inflation can be addressed by raising the reserve requirements for bankers making loans, raising interest rates, and by taxing money from the system. I'm assuming, of course, that inflation grows in a direct relationship with the money supply and that by manipulating the growth of the money supply inflation can be controlled. This will be akin to walking a tightrope. It will take skill, attention, and perhaps even a balancing pole, but isn’t that far better than taking just a few steps before falling down, again and having to go through this, again? Greenbacks forever!

[Halsey]

how can goldman sucks have record earning and profits when the rest of us little people border on...a thought I'd never imagined..­homelessne­ss? there is absolutely NO trickle down..the bonuses got HUGE again..nothing was built..no infrastructure improved...no bridges reinforced..just a few guys already wealthy beyond out comprehens­ion..getti­ng richer...and the middle class, where I USED to live..now entering lower class... this has been obama's biggest mistake..putting proven foxes in charge of the henhouse...no one should be resolved at the outcome...it's the old boys club..always will be U o Chicago and wharton... I'm really scared..

[olephart]

“Nouriel Roubini, is predicting the recession will end before year-end.”

No, he disavowed this statement and some say this was planted in the press.


“a rise in June home construction to the highest level in 7 months”

Home construction is seasonal; it usually rises from winter to summer. The real headline is “June home construction down 46% from year earlier.” Year over year not month to month is the more accurate comparison.


“the additional 522,000 people who applied last month for jobless benefits,”

That was last week, not last month.


Also, the report that retail sales were up 0.6% was a month to month comparison, the year to year number was a 9.5% decline.

[mbaty]

Why do people substitute the words "dollars" and "greenbacks," when greenbacks were a debt-free, government-printed form of currency that Abraham Lincoln used?

[KillTheMessenger]

All of my dollars are debt free. If yours aren't, well, that would be your problem, now wouldn't it. Just don't blame it on the money.

[jsarets]

Your dollars are someone else's interest-bearing debt.

[WASanford]

Hi Killer. I can't tell you how much I wish you were correct with this comment but when our government borrows from the Fed or China or wherever else, we all incur a debt for that money. That debt is a problem for all of us! Mbaty was referring to Lincoln's funding of the Civil War by exercising the power of Congress to "coin" money. You'll find that in Section 8 of our constitution. That money entered the economy unencumbered by debt and increased the supply of money sufficiently to keep the economy working during the Civil War. Many looked on the government printed dollars as funny money and refereed to them as "greenbacks." I'm glad you're totally out of debt, I'll be joining you shortly. Now if only we had a working economy.