There is an inexplicable, but somehow
widely held, belief that stock market movements
are predictive of economic conditions. As such,
the present rally in US stock prices has caused
many people to conclude that the recession is
nearing an end.
The widespread optimism is
not confined to Wall Street, as even President
Barack Obama has pointed to the bubbly markets to
vindicate his economic policies. However, reality
is clearly at odds with these optimistic
assumptions.
In the first place, stock
markets have been taken by surprise throughout
history. In the present cycle, neither the market
nor its cheerleaders saw this recession coming, so
why should anyone
believe that these fonts
of wisdom have suddenly become clairvoyant?
According to government statistics, the
recession began in December 2007. Two months
earlier, in October, the Dow Jones Industrial
Average and S&P 500 both hit all-time record
highs. Exactly what foresight did this run-up
provide? Obviously markets were completely
blind-sided by the biggest recession since the
Great Depression. In fact, the main reason why the
markets sold off so violently in 2008, after the
severity of the recession became impossible to
ignore, was that they had so completely misread
the economy in the preceding years.
Furthermore, throughout most of 2008, even
as the economy was contracting, academic
economists and stock market strategists were still
confident that a recession would be avoided. If
they could not even forecast a recession that had
already started, how can they possibly predict
when it will end? In contrast, on a Fox News
appearance on December 31, 2007, I endured the
gibes of optimistic co-panelists when I clearly
proclaimed that a recession was underway.
Rising US stock prices, particularly
following a 50% decline, mean nothing regarding
the health of the US economy or the prospects for
a recovery. In fact, relative to the meteoric rise
of foreign stock markets over the past six months,
US stocks are standing still. If anything, it is
the strength in overseas markets that is dragging
US stocks along for the ride.
In late 2008
and early 2009, the "experts" proclaimed that a
strengthening US dollar and the relative
outperformance of US stocks during the worldwide
market sell-off meant that the US would lead the
global recovery. At the time, they argued that
since we were the first economy to go into
recession, we would be the first to come out. They
claimed that as bad as things were domestically,
they were even worse internationally, and that the
bold and "stimulative" actions of our policymakers
would lead to a far better outcome here than the
much more "timid" responses pursued by other
leading industrial economies.
At the time,
I dismissed these claims as nonsensical. The data
are once again proving my case. The brief period
of relative outperformance by US stocks in late
2008 has come to an end, and, after rising for
most of last year, the dollar has resumed its
long-term descent. If the US economy really were
improving, the dollar would be strengthening - not
weakening.
The economic data would also
show greater improvement at home than abroad.
Instead, foreign stocks have resumed the meteoric
rise that has characterized their past decade. The
rebound in global stocks reflects the global
economic train decoupling from the American
caboose, which the "experts" said was impossible.
Though the worst of the global financial
crisis may have passed, the real impact of the
much more fundamental US economic crisis has yet
to be fully felt. For America, genuine recovery
will not begin until current government policies
are mitigated. Most urgently, we need a Federal
Reserve chairman willing to administer the tough
love that our economy so badly needs. That fact
that Ben Bernanke remains so popular both on Wall
Street and Capitol Hill is indicative of just how
badly he has handled his job.
Contrast
Bernanke's popularity to the contempt that many
had for Fed chairman Paul Volcker in the early
days of Ronald Reagan's first term. There were
numerous bills and congressional resolutions
demanding his impeachment, and even conservative
congressman Jack Kemp called for Volcker to
resign.
Had it not been for the
unconditional support of a very popular president,
efforts to oust Volcker likely would have
succeeded. Though he was widely vilified
initially, he eventually won near unanimous praise
for his courageous economic stewardship, which
eventually broke the back of inflation, restored
confidence in the dollar and set the stage for a
vibrant recovery. Conversely, Bernanke's
reputation will be shattered as history reveals
the full extent of his incompetence and cowardice.
As Congress and the president consider the
best policies to right our economic ship, it is my
hope that they will pursue a strategy first
developed by Seinfeld character George
Costanza. After wisely recognizing that every
instinct he had had up unto that point had ended
in failure, George decided that to be successful,
he had to do the exact opposite of whatever his
instincts told him. I suggest our policymakers
give this approach a try.
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