The stock market reversal in the last four days should give us pause. The recent economic data appears far more positive than whatever has powered the market rally to date. If we really are at the beginning of a V-shaped rebound, as many analysts are saying, there is no reason for the markets to fall, especially as they are still far below their peaks of two years ago.
Nor is there any reason for corporation insiders to be selling the company stock they own, as they have done throughout the month of August. If the economy is truly beginning to expand, they should instead be holding on to it for dear life.
So how real is the advertised economic recovery and where are the numbers backing it up?
In looking for such data, one first notices that positive numbers are remarkably scanty, and that what can be found is also very selective, with positive numbers emphasized over negative ones. But every economic swing, positive or negative, has a firm foundation somewhere, which can be found if one digs far enough to hit the bedrock. So let us dig.
The first of the layers to be cleared away is the one made up of forecasts and expectations. These are generally optimistic, but let it be remembered that many of the experts now predicting a sharp recovery also expected the Dow Jones to reach 16,000 by the end of 2007. The numbers they had then were much better than the current ones.
Hope springs eternal, but reality does not always follow, and predictions do not add up to hard information.
The second data layer to be removed is the one dealing with inventory replenishment. This is assumed to provide the activity bounce for the next two quarters, but it does not imply a recovery.
Inventories have to be replenished eventually as long as some economic activity exists. The key is at what level. It is only after we compare the inventory level to that of previous periods that we can tell whether activity is rising or falling.
We all have to eat. But what makes the difference to the economy is whether we eat prime steak or the cheapest hamburger. Until that is known, we will not know whether we are doing well or poorly.
The third layer of data that needs to be stripped off is associated with the government stimulus programs. Because government spending is fed by either borrowing or taxes it is a zero sum game: whatever it gives is taken away from somewhere else, even if there is a time lag between the giving and the taking.
This does not imply that make-work programs or social safety nets are bad. On the contrary, they will often feed people who otherwise would go hungry. But what is given to the unemployed is, ultimately and always, removed from the income of those who work, and would otherwise spend or invest it.
In addition, the transfer of income by the government from one group to another is not a frictionless operation. Some money will always be lost to inefficiency, fraud and the like. Thus a realistic assessment of the effect of stimulus programs needs to give them a slightly negative value: money transferred minus money lost in the process.
When the above three categories of data are stripped away, one must still deal with the selective utilization of the numbers that remain.
One could, for instance, conclude that housing sales are increasing even after the effect of government subsidies is taken away. But housing foreclosures are still increasing as well. Both affect the overall state of the housing sector, and one should not be considered in isolation from the other.
None of the above caveats are taken into consideration in the economic data currently presented to us. First, much of it is anticipatory.
Second, the issue of inventory levels after the expected replenishment is not addressed.
Third, government spending provides a very large part of the alleged economic upturn. Finally, integrated, complete data sets are nowhere to be found.
The question thus remains of whether the economy is in remission, critical but stable, on continuing life support, or still deteriorating. The stock market has gone as high as reasonable optimism would allow. Realism is now about to take over.
Nor is there any reason for corporation insiders to be selling the company stock they own, as they have done throughout the month of August. If the economy is truly beginning to expand, they should instead be holding on to it for dear life.
So how real is the advertised economic recovery and where are the numbers backing it up?
In looking for such data, one first notices that positive numbers are remarkably scanty, and that what can be found is also very selective, with positive numbers emphasized over negative ones. But every economic swing, positive or negative, has a firm foundation somewhere, which can be found if one digs far enough to hit the bedrock. So let us dig.
The first of the layers to be cleared away is the one made up of forecasts and expectations. These are generally optimistic, but let it be remembered that many of the experts now predicting a sharp recovery also expected the Dow Jones to reach 16,000 by the end of 2007. The numbers they had then were much better than the current ones.
Hope springs eternal, but reality does not always follow, and predictions do not add up to hard information.
The second data layer to be removed is the one dealing with inventory replenishment. This is assumed to provide the activity bounce for the next two quarters, but it does not imply a recovery.
Inventories have to be replenished eventually as long as some economic activity exists. The key is at what level. It is only after we compare the inventory level to that of previous periods that we can tell whether activity is rising or falling.
We all have to eat. But what makes the difference to the economy is whether we eat prime steak or the cheapest hamburger. Until that is known, we will not know whether we are doing well or poorly.
The third layer of data that needs to be stripped off is associated with the government stimulus programs. Because government spending is fed by either borrowing or taxes it is a zero sum game: whatever it gives is taken away from somewhere else, even if there is a time lag between the giving and the taking.
This does not imply that make-work programs or social safety nets are bad. On the contrary, they will often feed people who otherwise would go hungry. But what is given to the unemployed is, ultimately and always, removed from the income of those who work, and would otherwise spend or invest it.
In addition, the transfer of income by the government from one group to another is not a frictionless operation. Some money will always be lost to inefficiency, fraud and the like. Thus a realistic assessment of the effect of stimulus programs needs to give them a slightly negative value: money transferred minus money lost in the process.
When the above three categories of data are stripped away, one must still deal with the selective utilization of the numbers that remain.
One could, for instance, conclude that housing sales are increasing even after the effect of government subsidies is taken away. But housing foreclosures are still increasing as well. Both affect the overall state of the housing sector, and one should not be considered in isolation from the other.
None of the above caveats are taken into consideration in the economic data currently presented to us. First, much of it is anticipatory.
Second, the issue of inventory levels after the expected replenishment is not addressed.
Third, government spending provides a very large part of the alleged economic upturn. Finally, integrated, complete data sets are nowhere to be found.
The question thus remains of whether the economy is in remission, critical but stable, on continuing life support, or still deteriorating. The stock market has gone as high as reasonable optimism would allow. Realism is now about to take over.
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