Tuesday, July 7, 2009

In which I dare to disagree
with Francis Cianfracco

He's a successful Wall Street guy. Me? A mere blogger who can't even pronounce "Cianfracco." Yet I'm going to disagree with this:
When you have a huge collapse in economic output, as we have, then all your future measurements are coming off the much lower base. That's why everyone from President Obama on down can credibly say that the recession will end this year. Sooner or later the economy will stop shrinking, and when it does, by definition it will be growing again.
"Sooner or later," yes. But my hunch is "later," and certainly not before the end of the year.

Why do I say that? The Keynesian stimulus/bailout interventions have damaged the economy in ways that aren't going to be clearly apparent until months, if not years, down the line.

The real-estate bubble began collapsing in 2006, but it was not until 2008 that the bottom fell out, and the Keynesian interventions have only delayed the housing market from finding a solid bottom from which recovery can begin. Another wave of defaults and foreclosures is yet to come and, when that hits, Uncle Sam will have fewer resources available to rescue the financial institutions which will be bankrupted in the process.

If the government had avoided its deficit-swelling attempt to avert the natural economic consequences of the bubble's end, the misery would have been severe, but of relatively short duration, and the economy would soon have found itself at true rock-bottom, ready to rebuild.

Instead, interventionism created a false bottom. It's like one of those inflatable "moon bounce" things you rent for a kid's birthday party -- interventionism sends false signals that prevent the market economy from reacting rationally. So we got a three-month "sucker's rally" on Wall Street that ended last month but which many investors didn't realize was actually over until last week.

The Dow closed over 14,000 in early October 2007, and fell to below 6,600 by March 2009. Was 6,600 the real market bottom? Or was the movement upward -- which peaked near 8,800 on June 12 -- a result of false optimism generated chiefly by political inputs?

There are analyst who have said they don't think the Dow will bottom out above 5,000, and the Dow closed today at 8,163.60, which means if the pessimists are correct, stocks are at least 60 percent over their real value. Yet how are investors to calculate values rationally when Bernanke, Geithner and Co. are pursuing such insanely inflationary policies?

We will almost certainly be experiencing double-digit unemployment well into 2009, and Cianfracco references the likelihood of a "jobless recovery," which is not really recovery at all.

What causes the "jobless recovery" phenomenon? Inflation. Pumping up the money supply is an inflationary measure but, in a cycle where the real economy is experiencing deflation, there is no discernible impact on consumer prices. However, the immediate and direct recipients of the Fed's monetary largesse -- major financial institutions -- gain low-interest funds for investment, which boosts prices on Wall Street.

That is to say, investment markets absorb the inflationary pressure, and corporations gain value thereby, but without producing any meaningful improvement in the real economy, the kind of improvement that creates jobs. The high-tech bubble of the late '90s, and the more recent housing bubble, were examples of how inflation can be channeled into investment vehicles (stocks or houses) rather than impacting consumer prices.

Add to this toxic formula the heavy economic burden imposed by the endlessly expanding federal deficits -- to say nothing of the soaring entitlement expenditures that will begin when the Baby Boomers start turning 65 in 2011 -- and you have a perfect recipe for Carteresque stagflation.

With so many rational reasons for a pessimistic outlook, Cianfracco's sanguine expectation that recovery will begin before year-end looks irrationally optimistic. Which isn't to say it's guaranteed wrong. I just don't think a near-term recovery is likely.

However, I can't even pronounce "Cianfracco," so my pessimism may be more irrational than his optimism.

1 comment:

  1. Based on my own conversations with Francis, you two may simply be disagreeing on how hard the rubble is going to bounce.