In times of “irresponsible recessions” and related market chaos and meltdown situations, as the one he’s fending off now, Mr. Bernanke must put his grander plan on temporary hold and grudgingly step in, not to treat the economy but rather to cure the panic. In fact, he becomes the antidote to the market’s periodic unplanned “irrational irresponsibility”.
Mr. Bernanke is sure to be even more upset, and rightfully so, with the premature need to reduce rates, now knowing this recent bout of irrationally irresponsible market panic arguably and quite stunningly triggered by a staggering $7 billion plus loss engineered by lone rogue, junior trader at Societe Generale. To think, here Mr. Bernanke sits at the pinnacle of western economic defense, with a Plan to defend it over time against global Commulism, only to be duped (as was everyone else participating in the ensuing global equity sell-off) and accordingly usurped in his plan’s (rate cut) timing execution by having to address the global fallout from the actions of but one lowly, unsupervised, $140,000 per year Generation X’er.
Analyst’s Late Publishing Note: On Jan. 31, 2008, with the Fed’s 50 basis point rate cut, the financial television viewer audience witnessed “Cramer Capitulation”. He grudgingly had to shift from basher to endorser, well perhaps more appropriately neutral “non-basher” of the Fed. Not that he humbly admitted Mr. Bernanke is juggling two balls (China/Commulism (strategically) and U.S. recession (tactically)) very well, but rather boastfully, vainly taking credit for Mr. Bernanke’s actions. While not getting the recognition he deserved from Mr. Cramer, perhaps Mr. Bernanke can take some comfort and relish in his victory with Mr. Cramer on national TV putting his obnoxious, misguided and mis-wired “the Fed knows nothing” button out of commission. Mr. Bernanke, that’s about as close as you’ll get to a “Fed got it - from the start” button acknowledgement from Mr. Cramer. Enjoy it.
On GDP, noting that unexpected strong Q3 ’07 result as being achieved despite and confounding the forecasts of the expert economic gloom and doom recession-eers. In fact the third quarter showed a remarkably robust and much higher than expected 3.9% growth, which was upgraded from economists’ collective expectation of 3.1%.
This prompted Commerce Secretary Carlos Gutierrez and Ed Lazear, the Chairman of the President’s Council of Economic Advisers, to comment “that the data showed that the slowing housing market has not affected other areas of the economy as some had feared…..adding, this third quarter was fueled by consumer spending, business investment, rising net exports and non-residential construction. Housing remains a concern, but its impact is being offset by growth in other sectors of the economy", with Lazear contributing “that this is an indication of "an extremely resilient economy," noting that it is holding up even amid the housing slump and the worldwide credit crunch. Despite that, we still ended up with nearly 4 percent growth following another quarter where it had nearly 4 percent growth. So that, really, I think is quite an impressive statistic, and it's certainly encouraging to us”.
Of note too as respects “economic resiliency”, is that despite the many pessimistic economist estimates predicting a recession in Q4 ‘07, the economy instead eked out .6% GDP gain. The point being is it’s not a negative number. Rather it’s growth, albeit slower growth than both the previous quarter and Q4 ‘06. But still Q3 and Q4 were both significantly stronger than original economist estimates, meaning when one rationally looks past the gloom, usually there’s little doom.
In short, with the theme of this piece being China and (control of) the global economy, it is time to begin to think of the U.S. economy and the tools that influence it in global terms too. If the global economy is truly integrated as China astutely believes, then so too should the U.S. and WEAST. That linkage and integration to it is key. No longer can the U.S. go it alone or think of itself as an economic (resort) island. That is both good and bad. It’s good from the standpoint the U.S. economy can no longer go bust on its own, yet not so good that it can no longer boom on its own either. The boom times are tempered yet so are the bust times, with the real objective to achieve sustained healthy growth rates.
Like a stock portfolio, consider the U.S. economy part of a portfolio too so to speak – i.e. a diversified global economy. One of the benefits of this integrated global economy, when it is healthy in the aggregate, as it is now, is its ability to absorb and mitigate pockets of geographic hiccup or pain, as is the case now with the U.S. That would not have been the case several years ago with a more decoupled, less integrated global economy.
In effect, the U.S. economy has become a coupled component, albeit significant one, but still a part of the global economic fabric. Global economic integration then in effect results in a built-in shock absorber effect - mitigation to both the upside and downside, creating greater stability and disciplined growth.
Those experts pontificating that the combined credit (sub-prime) crisis, housing slump and record oil prices will drive the U.S. economy into recession miss the big picture, as they do too the benefits of a lower dollar on recession avoidance and/or mitigation. They take a myopic U.S. economy only approach, rather than how these issues impact the U.S. from a global economy integration perspective and how that global economy reciprocally affects the U.S.. With the global economy healthy and growing, and most economists and analysts arguing that will continue, even if tempered slightly, then the risk of recession in the textbook sense, to the “aggregate” U.S. economy from its own noted self inflicted wounds (credit/housing), will fortunately be greatly reduced. The result being even less of a chance of recession, and even if it does slip into recession, will be one that is shallow and short lived. Again, this assumes the global economy continues growing, and conceding the U.S. economy may still endure as it already has, some serious “sector recessions” as is occurring now in the housing sector for example.
Late Publishing Note: The over-reaction this past Tuesday in the equity markets (Dow down 370 points) to the disappointing information on the service sector, is in this Analyst’s opinion, not cause for concern. In the context of a theme of “no recession and/or a very mild and short one”, there is still more news for sure to come, which like this news, while less than positive, won’t change the overall outlook either.
Therefore, while the U.S. economy benefits from an integrated global economy in the near term, China benefits far greater both short to long term. That integrated global economic fabric making it that much easier to overlay a spider-web of economic control.
Economic Stimulus (aka “Botox”) Package: The Stimulus Plan does not even pass the “Botox test”. Botox at least provides a brief, artificial and superficial improvement, which quickly disappears as if it never happened. Indeed, its akin to costly “no benefit” indulgement. The Stimulus, on the other hand, won’t even provide immediate superficial improvement, given it stimulates China, not the U.S. (see “Which Economy?” below). In fact it becomes nothing but a “Placebo shot” to the U.S. economy.
Contrary to the Chicken Little economist and investment communities, mild recessions are not all bad and are actually long term quite beneficial as they create opportunities for important awareness and needed direction/course adjustments in an environment of little pain. If one believes the U.S. is either not going to reach the textbook case for recession (see late publishing note above), or at worst it will be a mild and very brief 0-1.5% downturn (contraction) adjustment, then all the hoopla in Washington and the press about an economic stimulus package is for naught. This is not a deep, two year recession situation. At worst, it will be brief and mild, however, counter-intuitively, slightly exacerbated “because” of the perceived stimulus messaging (i.e. things are worse than they seem) by the consumer.
Adding further senselessness to the politically driven (election year) economic stimulus package, “if” (and the Analyst contests it was never needed earlier or now) it was needed at all to really impact, deflect and/or mitigate recession, then it should have been implemented 6 months ago. Instead, it was only recently recognized as but one more new political twist to mix into the campaign rhetoric – to try and keep (make) it interesting. Now adding further delay to an idea who’s time should never come, especially not now, the need to fully draft the Plan, pass through both houses of Congress (after weeding out the expected usual pork earmarks and add-ons always attached to new bills) and then approved by the President. “Assuming” Congress expeditiously agrees on a plan and passes it, given the high profiled public spotlight of the plan, and the President promptly signs it by mid to late February, the checks will then not even likely being mailed “until May/June”, given the bureaucracy execution challenges. Of course, if there are partisan and/or House/Senate related delays (as noted above in the Senate), the checks won’t go out until much later.
Late Publishing Note – On Feb. 6, 2008, the Senate version ($205 billion) failed to pass, given the $40 billion or so add-ons above and beyond the $161 billion House approved bill – meaning “delay”. Interestingly too, it failed to pass by just one vote, 58-42. That “no” vote (#42) an unexpected last minute surprise flip by Majority Leader Senator Harry Reid.
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