Is it me?
I just can’t help but feel that there’s something the stock market’s missing about the economy. It’s a feeling I had back in 2007 as well. The market was marching giddily higher, right into October, and the whole time, I’m thinking to myself, there’s something wrong here. You didn’t need to know about derivatives, securitized debt, CDOs, CDS or mortgage fraud. Home prices had doubled in five years, wages were flat. It was the very picture of an asset bubble.
Now, I see a recovery that looks like Pinocchio: it wants to be a real little boy, but it’s really just a wooden toy that moves only when somebody pulls its strings. But everywhere, we hear people talking up the recovery as if the economy is sprinting into a new bull market.
Listen, I’m no PhD. I’m willing to entertain the idea that I could be wrong. There are a lot of smart people who probably think I’m wrong. Of course, there were a lot of people much smarter than me who were wrong in 2007.
But I keep seeing all those strings pulling the economy, and wonder if and when they can be cut.
For one thing, the stimulus programs that have come out of the federal government and Federal Reserve have underwritten the recovery. These include cash-for-clunkers, the first-time home-buyer tax credit, the Fed’s facilities for buying Treasurys and mortgage-backed securities, as well as its move to lower its federal funds rate to essentially zero.
Cash-for-clunkers provided a spike to auto sales, but the program has already expired, and the auto sales are already falling back to the levels from before the program. If the rest of the stimulus programs have a similar temporary effect, the economy may be stuck in its current state for some time.
Then there’s inventory replenishment. This is one of the biggest props of the recovery theory. Companies have been slashing inventory levels, and the notion is that once they begin restocking the shelves, it will provide a big boost to activity.
Through August, at least, this process had not started. Inventories were still falling, the Census Bureau reported. If September doesn’t exhibit some rebuilding, this plank will start popping some serious holes. For one thing, now is the time when companies start stocking up for the holiday season, which apparently lasts longer than actual seasons like winter (indeed, K-Mart and Target are already selling Christmas merchandise.) So we should already be seeing some inventory building. Shouldn’t we?
I can see this rally running through October, because the Fed is still underwriting the stock market, through the bond-buying programs, and money managers are still chasing returns, and likely will through their October fiscal years end. The Fed will still be buying MBS through year-end, but winding it down.
Washington’s hope is that the stimulus will eventually give way to a natural momentum that will pull the economy out of recession (and no matter what the President or Fed Chairman or anybody says, right now at least, we are officially still in a recession.)
But if that momentum doesn’t build on its own, if those props disappear, and at the same time holiday sales come in weak, well, that could spell trouble. Another thing to keep an eye on, of course, will be corporate profits. They should start looking better given easy comparisons to last year, but the market is building in a lot of upside there.
But maybe it’s just me.
(Images: Andre Koehne, wikipedia commons)
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September 22, 2009
[...] some reading for your afternoon pleasure: • The Pinocchio Recovery (Market [...]