"Collective fear stimulates herd instinct, and tends to produce ferocity toward those who are not regarded as members of the herd." —Bertrand Russell
Yes, markets around the world are tanking. But look, I'm going to play the bullish side of the recession trade until the data tell me different. (And I felt that way even before the Fed jumped in with a cut of three fourths of a percentage point in the fed funds rate this morning.)
Most of my fellow ink-stained wretches may have displaced dread about their own industry onto the larger economy, but I am not going to join them. Indeed, a study by the Business & Media Institute found that television news programs, for instance, have consistently reported that a recession is a done deal, even though most economists have not been saying that. The negative psychology—whether caused by the media, falling house prices, or, now, a falling stock market—can, as JPMorgan economist Bruce Kasman says, "easily become self-fulfilling, as it induces greater caution and thus a contraction in spending among corporations and households."
What's more, Punk Ziegel banking analyst Dick Bove reports that he's been taking an informal poll of financial journalists calling and found unanimous pessimism. Maybe I should give Mr. Bove a ring to break the string of doom-and-gloomers. I still think there are solid reasons to believe this six-year expansion will see a seventh birthday despite what panicky investors seem to be saying right now:
1) The job market. Where are the layoffs? Companies usually begin shedding workers before the economy tanks. But weekly initial jobs claims were an extremely low 301,000 last week, not the 400,000 that's more typical of recessions. Now granted, companies are not hiring much either, apparently, if you believe that lousy preliminary December jobs number. (The Labor Department's first swipe at data is notoriously inaccurate.) Yet let's not forget that at 5 percent, unemployment is still low on a historical basis, and companies in this new economy are understandably reluctant to cut skilled workers in such a tight environment. Looking at recessions in recent decades, economist Robert Brusca found that "only the 1973 recession began with a significant, persisting decline in jobless claims. December 2007 does not look much like the start of recession."
2) The credit markets. While Ben Bernanke's Federal Reserve has been conducting a McClellanesque war on the credit crunch until today, fixed-income investors have been going the "shock and awe" route. Treasury yields have dropped 1½ percentage points or more vs. 1 percentage point in the federal funds rate. Fixed mortgage rates have fallen to their lowest levels in 2½ years, causing refinancing to perk up. More liquidity is helping lower risk. The three-month Libor rate, for example, has plunged to 3.85 percent, lower than the 4.25 percent fed funds target rate and down from 5.15 percent three months ago. And as economist Mike Darda at MKM Partners notes:
Commercial paper spreads also have narrowed. Swap spreads—one of the best leading credit indicators available—also have tightened significantly. If this improvement holds, it would suggest a material snap-back in equity prices and an eventual narrowing of junk-bond spreads (which have moved out to 620 [basis points], above historical averages near 500 [basis points]).
I will say, though, that troubles at bond insurers MBIA and Ambac Financial Group do worry me greatly.
3) The global economy. Although the foreign economies seem to be slowing, that multitrillion-dollar boat still has a lot of momentum. One way of gauging its health in real time is by looking at commodity prices, in particular the CRB raw industrials spot index, which is still hovering around record highs.
Hey, I'm not saying any of this will make folks so giddy with optimism that they'll go right to the mall and spend those anticipated "fiscal stimulus" tax rebate checks from Uncle Sam.