Economic growth hit 5.7% in the last quarter of ‘09.  We should be hitting a rebound at this point in the cycle, but Wall Street is still in the midst of a losing streak. What gives?

First,  it is always dangerous to assess the economic scene by a short term move in the stock market; there are just too many factors affecting the market. But there are other reasons for caution.

Part of the pickup could be a ‘dead cat bounce.’  This could be that inventory levels have been depleted so low that businesses have no choice but to buy inventory  in order to keep the doors open. In the metal and some commodity businesses an uptick in prices had many scrambling to get inventory in before the price increase.

But if backorders are not increasing and end users are not  buying more, this bounce will be temporary.

Some projects that had been put on hold during the initial economic shock are moving forward, especially in businesses such as electric utilities that must keep pace with maintenance and demand and do not have problems getting credit or still showing a profit.

You may have put off replacing you old car, but if you still drive you will eventually need a new car, or at least new tires for your old car.

If we can grow 5.7% with record unemployment, what does this say about business demand for new employees? Employers who see no strong end user demand will keep employment lean, and will shun capital investment.

Inventory pickup is often the first sign of a recovery, but that assumes that the end user demand is there to justify it. Housing demand and employment should soon follow. If it doesn’t this recovery will flatten out soon.

“In moving, even tentatively, into this new area of lending (subprime) Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government -subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s”  (New York Times in 1999)

“The success of the two companies (Fannie and Freddie) in both the financial and political arena inevitably fostered a culture of arrogance. “We always won, we took no prisoners and we faced little organized political opposition,” Daniel Mudd, then president of Fannie Mae, wrote in a 2004 memo to his boss. That overconfidence led both companies eventually to move into derivatives and to employ aggressive accounting measures. They were later found by regulators to have manipulated their earnings, and both were forced to restate years of results.  The CEOs of both companies were ousted.”

From Too Big To Fail by Andrew Ross Sorkin

My second article in American Thinker

A Political Recession

Excerpts:

Growth is being restricted by political uncertainty more than economic policy.

More business people who are either able or nearing retirement are “going Galt”, downsizing or reducing their income and expenses, refusing to spend their labor to support a government antagonistic to their efforts.

While the government is trying every economic stimulus in the play book, they are counteracting it with political initiatives that effectively destimulate economic and job growth with confiscation and uncertainty.

I have been a fan of Nassim Taleb since I read “Fooled by Randomness”. I remember stumbling in it the bookstore at Columbia University in New York. I quickly grabbed his most noted book, “The Black Swan” which continued his philosophy of human behavior and our poor understanding of risk and statistics. His warning of the fragility of our financial system was prescient.

On MSNBC (read and view the interview here) Taleb recommended that the banks convert mortgage loans to partial equity in an effort to drastically deleverage the economy, which he sees as our main problem and very little is being done to address.

I thought it was a great idea. It helps the homeowner get a fresh start. The most debt is not in the Wall Street firms but in mortgage debt to the consumers. Instead of bailing out failing organizations we could reduce crippling bank debt and help consumers at the same time.

Taleb is a great intellect with an uncommon depth on the subject. He may be a bit of a hard read for some and many consider him too far out of mainstream to be credible, but look where mainstream thinking got us. I found him insightful and claryfing.

If you are not inclined to read such material for fun, check out his many interviews on YouTube.

Tips to Douglass Ott.