As that gaudy rally from last March to May recedes further into the past, the market is finding new preoccupations. The market’s favorite letter back then was V, as in the V-shaped recovery. But now it’s most dread letter (no pun intended) is D, as in demand, as in deflation, as in deleveraging, as in as in double-dip, as in depression.
That flashy rally got a lot of people thinking the worst was over. It had to be, because the market is a leading indicator, the stock market is a discounting mechanism that’s always ahead of the economy. If the market is rallying, it means the smart money is betting on a recovery, and the smart money is never wrong (if it was, it wouldn’t be the smart money, now, would it?)
Yet, and we’ve made the point several times but it’s worth repeating: they thought the worst was over in 1930, too. And in 1931. And in 1932.
One of my favorite websites is the Joliet, Ill., library’s site. They have this great page with business headlines from the local papers from the early years of the Depression. All the leading lights of the day, from President Hoover to Irving Fisher to John Jacob Raskob, thought the “worst was over,” and some bright, shiny recovery was just on the horizon. They were all wrong.
I wonder if our leading lights today may be similarly mistaken. It’s amazing that for as much as the current Fed Chairman made his bones as a student of the Depression, the Fed today finds itself stuck, unable to figure out a realistic path for monetary policy that can alleviate the economy’s biggest problem, which is that nobody’s hiring (at least, in any great numbers.) The Fed was supposed to be managing its exit from the markets by this point, but instead all the conversation is about what it needs to do next to prevent the economy from sliding backwards. Which it’s doing on its own regardless.
So let the sell-side blather on about bond bubbles. It’s amazing that the same end of the spectrum that couldn’t see the dot-com bubble or the housing bubble somehow suddenly has crystal clarity on the subject. What the bond market is really saying is that the recession never really ended. Sure, part of what’s going on in the bond market has to do with the Fed nailing interest rates to the floor, with plans to keep them there until the economy improves or pigs fly, whichever comes first.