By Daniel M. Ryan
After last Friday's spill, Wall Street has lost a lot of its optimism. There seems to be a new consensus emerging, saying this market will be like 2001's. The bears are back on the financial news channels, and both Federal Reserve economic forecasts have been downgraded. Neither the FOMC nor the staff forecast expects positive GDP growth for the rest of 2009.
There's even a political consensus forming, which has centered on the cratering of the bank stocks. Many Republicans blame a ham-handed Obama administration, while the Democrats say that last week's drop is fully revealing 2008's problems. The voices still saying that recovery'll start in 2009 are becoming fewer and more anemic. I myself have to admit to jumping the gun last October when I called for a new bull market. November's sell-off was matched by last week's; that's indication enough that I was, to be charitable to myself, early.
The chief holdback to recovery in the U.S. stock market averages has been the financials, of course, with the exception of the big brokerage houses. Commerce Secretary Geithner's announcement of the Obama bailout plan triggered the selloff, and it was only halted Friday afternoon by the White House announcing that nationalization is off the table. Instead of shrugging off bad news, as was the case last January, the market now drops on good news. One telling statistic that failed to rouse the averages was the greater-than-expected 0.4% rise in the Index of Leading Indicators. There's a certain irony in that ignorance, as many individual stocks that have bested expectations have shot up. Had the market climate been like January's, the averages themselves would have likely shot up too.
Differentials and Reflation
Another one of last week's surprises came from the price-series division of the Bureau of Labor Statistics. My last month's poke-through of the CPI and PPI numbers revealed a seeming bottoming process. January's regular and core [ex- food and energy] CPIs was were both up, and the finished-goods PPI was up even more. December's 1.9% drop in the last series stands beside January's 0.8% rise. The core PPI was up too, by 0.4%, which made for a faster rise than the 0.2% rise in December. Intermediate goods, both regular and core, dropped in January…but at a much gentler rate than December's drops. The January decline in the price of crude goods was less than December's, and January's core crude goods were up by 0.1%. December's had plummeted by 2.2%.
The amelioration of those decline rates still paints the same picture as last month's: a reflationary bottoming process. It's true that the ballooning in the money supply could be faking out the Index of Leading Indicators. It's also true that the reflationary trend could merely be a reflection of severe supply cuts, but not recovery. Nevertheless, both together show more than a statistical fake-out; each of them have different bobblers. If the stock market has been solidly rational this month, then all three put together signal serious stagflation – even though the commodities index hasn't anticipated any such thing.
As noted above, I have a "sunk article" bias with this question. The best interpretation for the finished-goods core-PPI and -CPI rises would be supply squeezes, given that the retail and manufacturing sectors have been gutted. Supply squeezes could also explain the suspicious rise in the core crude goods series, and the near-halt in the commodity series' decline. Nevertheless, the near-flatness in both suggests another factor is at work: reflation.
It's too early for me to definitely point to a recovery, but that's the way it's going. The raw-materials sector has been hurting, but the hurt has not been recent enough for supply squeezes to be the sole reason. Price-wise, the bleeding is being staunched.
If the Hayekian stages of production model speaks to these times, then price-decline arrests will occur farther up the production chain as winter turns into spring. This interpretation is confirmed by the above-mentioned jump-ups in the Leading Economic Indicators and the money supply. Although belied by recent stock market action, it looks like the bottoming is continuing. The American economy might very well see (barely) positive GDP growth by the third quarter of '09.
The stock market isn't always rational; every now and then, greed or fear predominates. This last plummet has been fear-based; it got rolling due to lack of confidence in Commerce Secretary Geithner's announcement last Feb. 10th. The economic data haven't co-operated with the stock market in its plummet; any discounting does not seem to be discounting the performance of the overall U.S. economy. If my seat-pants analysis is correct, then the current spill was discounting officials in the Obama administration…
…and perhaps deterring them.
Get weekly updates about new issues of ESR!