THE BLOG

Grandma Knows Best

08/17/2009 05:12 am ET | Updated May 25, 2011

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.

Dandordan@aol.com