Still betting on economic doomsday — and still waiting
In any other economic recovery, setting a 2 1/2-year low in weekly unemployment claims would have been unequivocally good news.
But in this recovery, many Americans take upbeat data like the latest report on new jobless-benefit filings with a truckload of salt. Or reject it entirely.
After all, they say, how can we believe anything the government tells us?
This certainly doesn’t feel like a recovery to most people. The U.S. economy has grown for five straight quarters, but a CNN/Opinion Research poll in late September showed that 74% of Americans thought the recession still hadn’t ended.
So what if the stock market hit two-year highs this month? Isn’t trusting the market only slightly dumber than trusting government statistics?
On the Internet, there is an army of people who will immediately and bitterly dispute anything they read suggesting that 1) the U.S. recovery is real or 2) the global financial system has any hope of avoiding another meltdown.
Barry Ritholtz, head of investment research firm Fusion IQ in New York, calls these folks the “zombie bears.”
“They will not admit the economy is getting better, albeit slowly,” Ritholtz wrote this week on his widely read economics and markets blog, The Big Picture. “They insist the recession was a depression; they insist it never ended. These are the bears who cannot be killed. They will stay bearish, regardless of the data that all but insists otherwise.”
That ought to sting coming from Ritholtz because he was a hero to the bear camp heading into the 2008 financial and economic crash. He had predicted a severe comeuppance after the nation’s long debt binge, and we got it.
But by the time the stock market hit its low point in March 2009, “We already had a massive crisis and collapse, so the worst of what came before was already reflected in equity prices and trader psychology,” Ritholtz said. It was time to reassess.
By refusing to believe that a recovery would follow, the zombie bears have sat out a 70% rebound in the Dow Jones industrial average from its 2009 low — and far bigger gains in many foreign markets.
If complete economic ruin is just around the next corner, however, missing the rally will mean little. And you don’t have to troll far in the financial blogosphere to find a torrent of commentary from people who remain convinced that the whole mess will come crashing down any day now.
What’s going on in Europe this month has energized the doomsday camp yet again. Facing crushing debts, Ireland has been forced to follow Greece and take a bailout from the European Union. On Friday, rumors swept markets that Portugal was next in line at the bailout window.
Three weeks ago the euro was hitting 11-month highs against the dollar, and a favorite meltdown scenario centered on the demise of the greenback. Now, it’s the euro that is sinking fast — it fell to $1.324 on Friday from $1.367 a week ago and $1.421 on Nov. 4 — and it’s no longer taboo in Europe to discuss ending the 12-year-old experiment with the common currency.
Whether that would be catastrophic for the global economy or even for Europe is far from clear. But it’s understandable that anyone who’s anticipating financial Armageddon would view the euro’s sudden slide as confirmation.
It’s human nature to see our present situation, and the future, through the prism of our recent experiences. After living through what was (or is) for many people the worst economic nightmare of their lives, it’s not surprising that we’re now constantly looking over our shoulders, fearful that another crisis is imminent.
In the economy and markets, “People are afraid that every little dip is going to be a collapse,” Ritholtz said.
We all know that the U.S. economy has been badly wounded by the Great Recession. We know that the unemployment rate is 9.6% — 17% if you count the underemployed and those who have stopped looking for jobs.
The Internet also echoes with the pleas of about 2 million long-term unemployed who face a cutoff of jobless benefits Tuesday if Congress fails to vote for an extension.
It’s painfully difficult to reconcile their plight with the fact that 140 million or more Americans are expected to be out in force shopping this weekend, hoping to give a decent holiday to their kids or other loved ones.
It’s also difficult to reconcile the ongoing struggles of many small businesses with government data this week showing that U.S. companies’ earnings reached an annualized rate of $1.66trillion in the third quarter, the highest ever before adjusting for inflation.
The psychologically unsatisfying reality is that the Great Recession has further bifurcated the economy. Most people still are working, yet for many it will be a long time before they get another job, if they ever do. Many companies are more efficient than ever and are sitting on mounds of cash, but their success often is overshadowed by stories of other businesses hanging on by a shoestring.
The question, then, is whether the “haves” can offset the “have-nots” to a great enough degree to keep the recovery going.
This is where the zombie bears concede nothing to the economic optimists.
The recovery is a sham, the bears say, because the global economy’s dive in 2008 and early 2009 was halted by massive financial intervention by governments and central banks worldwide: unprecedented money-printing and rock-bottom interest rates.
With Europe’s debt crisis flaring again, and with the Federal Reserve this month committing to spending nearly $900 billion more to buy U.S. Treasury bonds by mid-2011, it’s clear that governments’ previous efforts weren’t enough. They’ve been trying to solve a debt problem by papering it over with more debt.
“The worries about things falling apart stem from the sense that we haven’t really fixed anything,” said John Hussman, an economics PhD who heads the $9-billion Hussman Funds in Maryland.
While he says it makes no sense for the U.S. government to impose austerity measures on the economy at this stage of the recovery — the route that Europe is taking — he still believes the Fed’s policy is “reckless.”
Even so, Hussman said, “I’m not expecting the economy to fall off a cliff,” in part because of the corporate sector’s financial strength. “Many companies’ balance sheets are liquid; they can handle a lot of pain,” he said.
But for the global economy overall, the debt buildup of the last 30 years remains the paramount issue. One way or another, the debt has to be resolved.
Governments and central banks want us to believe that the debt load can be worked down over time without destroying the economy and the financial system in the process. They’re counting on the spending of the haves around the world to make up for the drag on the economy from the have-nots (including the hopelessly debt-ridden).
The zombie bears are certain that the worst lies ahead, and that consumers and investors should prepare accordingly — although how exactly to prepare is a matter of debate.
“We need a deleveraging, deflationary depression, and in three to five years we’re going to have a much better economy,” said Michael Pento, senior economist at Euro Pacific Capital in New York.
“We just have to go through hell in the meantime.”
