THE BLOG
09/22/2009 05:12 am ET Updated May 25, 2011

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