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Ignoring the Economic Flashing Lights and Blaring Siren

By: Steve Johnson

5/21/2008 - 15 Comments

Everyone (including me) wants to be optimistic about the future of the economy. But, it's just not in the cards.

I have never seen the fundamentals this bad and the longer we try to speed up and outrun the principles of economics while pretending not to see the flashing lights and blaring siren – the harder the crash is going to be.  You cannot outrun bad monetary policy.  In the end, it always catches up to you. 

Optimism Is Not An Economic Strategy

The Wall Street firms, Fed chairman and the administration are holding on to their optimisms like it’s their salvation.  But, you cannot talk yourself out of the coming recession, just like to cannot talk yourself out of dying -  it will still happen. 

Sure, to some extent, optimism is an economic strategy and has been used with success in the past – like after 911, but that was when we didn’t have the major problems we have today.  That was before we had an 800 billion trade deficit and a falling dollar and a housing market collapse.   After 911, we had money (credit cards and home equity loans) to spend the economy out of the recession, but this time we don’t. 

World Economy Is On Thin Ice

According to the U.N., “The world economy is "teetering on the brink" of a severe downturn and is expected to grow only 1.8% in 2008, the United Nations said in its mid-year economic projections Thursday.” And despite the slowdown in global economic growth in 2008, the U.N. said global inflation is accelerating.

Reference Article: World economy on thin ice - U.N.

Consumer Confidence at 28 Year Low

Yahoo news reported that;

“Consumer confidence tumbled to its lowest in 28 years this month, a survey showed on Friday, as short-term inflation expectations hit their highest since the stagflationary early 1980s.”
“The news heightens the dilemma for the Federal Reserve, which has bet that slowing economic growth will tame inflation pressures that are building up.”

Reference Article: Consumers' mood grim in May: survey

Stock Market Continues to Climb

What I don’t understand is how the stock market can continue to climb in light of these facts?  I read yesterday that 40% of the stocks have missed their projected earning, yet Wall Street financial firms have a ‘sell’ recommendation on only 5%.  Something is definitely not right. 

The last two recessions have only lasted 6-9 months.  This fact has investors buying stocks that are cheap if the economy is about the rebound.  So, investors are buying based on their faith in the Federal Reserve and the history of the last two recessions, instead of projected earnings.

If the economy does not turn around in the second half of this year, then investors will have to disregard the history of the last two recessions and again rely on projected earning – which will also be much lower by then.  Unless the Fed can come up with another home run bailout, this could lead to a large sell-off of the stock market.  Just in time for the election.

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