Posted on 01/11/2006 7:47:30 AM PST by SirLinksalot
Climbing a Wall of Worry
By Donald Luskin December 9, 2005
IS IT THE BEST of times, or is it the worst of times? GDP growth is robust, unemployment is low, and corporate profits, home ownership and household wealth are at all-time highs. The economy is practically roaring. Yet in a recent poll1, 43% of Americans said they believe the economy is in a recession!
So with stocks making four-year highs this week, what should you do next? If you believe the numbers, then this is a great time to be long stocks. Bull markets, it's said, climb a wall of worry. Based on those poll results, there's no shortage of worry. With an economy that's objectively quite strong, you've got all the makings of a bull market.
But with so many people worrying, you have to ask yourself if maybe they're on to something. It's like when you walk outside on a sunny day and everyone is carrying an umbrella. It makes you think maybe they know something you don't know about where the weather is heading.
Does that mean we're in a recession, just because 43% of Americans think we are — or maybe that we're heading into a recession? No, but we certainly need to figure out what's got so many people so down on the economy.
I think a big part of the answer is that our expectations for the economy are simply set too high. The last years of the 1990s were a mega-boom of the type that only comes along a couple of times in a century. But those years have, to some extent, become our definition of good times. Against that benchmark, we'll always be disappointed — and unreasonably so. After all, is it reasonable at this point to think that stocks are in a bear market until the Nasdaq Composite Index gets all the way back up to 5,000? Don't hold your breath.
I think another part of the answer is politics. In the election last year, and ever since, Democrats have relentlessly attacked anything and everything that's even slightly imperfect about the economy and blamed it all on the Bush administration and the Republican majority in Congress. And the media, which I think is biased against the president and certainly thrives on bad news in any case, has been only too happy to carry the message.
Ironically, Bush himself has contributed to the atmosphere of pessimism about the economy. In his failed attempt this year to rally support for Social Security reform with private accounts, Bush's most insistently repeated message was the economic catastrophe facing the nation someday when insupportable retirement claims against the system come due.
In fact, many of the president's conservative supporters, including my friend Larry Kudlow, have publicly expressed frustration that he hasn't done more to take credit for the objectively good news about the economy. So over the last several weeks Bush has gone on an economic "charm offensive," giving speeches around the country emphasizing how good things really are.
These speeches may be just more politics, but the statistics don't lie — or at least they don't all lie at once. The preponderance of evidence is overwhelmingly in favor of the conclusion that we're in the midst of very good times. And there's no reason why we shouldn't be. Interest rates and tax rates are still very favorable for growth. As I've written here recently, we're facing some risks to the continuation of those favorable conditions. But for now, as I said last month, "It's all good2."
Well, to be perfectly precise, I shouldn't use the word "all." As in any dynamic economy, ours today faces challenges, and some parts of it are working better than others. As ever, there are winners and losers. It's not fair to focus solely on the negatives for political gain. But neither is it fair — nor smart for investors — to ignore the negatives.
One of the negatives is that the composition of wealth in the U.S. has changed dramatically over the last decade. Notice I didn't say "distribution" of wealth, as so many commentators do. I don't think of wealth as a fixed quantity to be somehow "distributed." Rather, wealth is a dynamic, living, growing thing, the composition of which naturally changes through time as it expands. The change in wealth over the past decade has been the emergence of a relatively small number of people who are wealthier than almost anyone ever has been before. Until recently, wealth like that of Bill Gates or Warren Buffett would've been nearly unthinkable.
The really smart people experience the emergence of this new class of ultra-rich as an inspiration. Isn't it great, they say, that Bill Gates has redefined the upper end of what is possible? Where he goes, maybe I can follow.
But there are others who see it more darkly. There are some rich people who are frustrated that they aren't at the top of the pyramid anymore (now the ultra-rich are). And there are some ordinary people of ordinary means who, whenever they experience any setback or frustration, find it all too easy to blame the new ultra-rich for their problems. It just isn't fair, they say, that I'm stuck in this go-nowhere job when Bill Gates is so darn rich.
This frustration is probably most intense among working-class Americans, who've experienced fairly stagnant incomes — at least after adjustment for inflation — over the past five years. When you take into account lower tax burdens and the increased value of employment benefits, income growth doesn't look so bad. But in pure cash terms, working-class salaries have gone nowhere for five years, and that's a frustrating thing when at the same time some have become so famously and fabulously rich.
It's a reality that, with the emergence of China and India as economic powers, the world's labor supply has suddenly been vastly increased. That drives down the world-wide cost of labor. At the same time it bestows fabulous rewards on the entrepreneurs who figure out how to capitalize on the dynamics of our new global business environment.
That makes today's mood of pessimism a strange combination of fact, fiction and paradox. These are very exciting times in which the economy really is roaring. At the same time, there are many people who feel left out and who have no idea how to get in the game. That creates an opportunity for politicians who seek to get elected by fanning the flames of frustration and envy, and peddling phony solutions to very real challenges.
The bottom line of all this for investors is that the risk isn't the economy; it's politics. The reality of the economy is good. The challenges we face are just opportunities to make a good thing better. But we can screw it up by killing the goose that lays the golden eggs — by punishing the economy's winners with high taxes and draconian regulations that don't end up doing a darn thing to help the economy's losers (somehow those things only seem to help the politicians).
So I'm going to continue to be a bull until I see Washington really screw it up with tax hikes on the rich, import tariffs on China, windfall profit taxes on oil companies, health-care mandates on Wal-Mart Stores (WMT3) and other similar mayhem. The economy is strong, and it will stay strong right up until the moment that our elected officials kill it.
Donald Luskin is chief investment officer of Trend Macrolytics, an economics consulting firm serving institutional investors. You may contact him at don@trendmacro.com4.
This is courtesy of the leader of the Krugman Truth Squad ( a group of bloggers who read the professor's NY Times columns and correct his inaccuracies and omissions ).
Great time to invest...everyone is worried. When everyone is worried, get your money to work! There's plenty of dough on the sidelines set to come into the financial markets.
Housing? Still a good investment, but nothing goes up 20% year after year.
Stocks have been largely stalled since March, 2000. It's time to get busy!
Yeah, I tell you, I was just up all night with my stomach in knots and chewing my fingernails after the Dow broke 11,000.
I just heard on the radio Apple sold 19 million iPods. Can you imagine.
Time to get stock in itunes since they will be downloading music.
<<<<
after the Dow broke 11,000.
>>>>
And consider this -- GM is part of the DOW JONES INDEX. Had they rebalanced the portfolio and replaced GM with Toyota, the Dow could have gone higher.
The core number of Rats and independents who swallow the left MSM hook line and sinker.
The rest of us are too busy working, participating in community service or church to notice.
IMHO, the worry part is not so much about the economy of the US, but what will happen to it if there is another 9/11.
Unfortunately, this is a mind set difficult for anyone to overcome and in that respect the terrorists have been able to hinder America in many subtle ways.
The double bottom "W" that formed in Oct 2002 and Mar. 2003 was the beginning.
Small and mid cap stocks have been red hot.
Now it's time for the blue chips to catch up.
<<<<
Yet in a recent poll1, 43% of Americans said they believe the economy is in a recession!
>>>>
Actually, I'd say that this is a combination of the relentless negativity of the MSM ( which continually tauts worrisome data and overlook the good ) *AND* the REAL worry of Americans that their jobs are not secure because they may be outsourced anytime or due to the record spate of mergers and acquisitions, they will be made redundant.
JOB STABILITY is a REAL PROBLEM anyway you look at it.
Yowser!
From every poll I have seen in the last 30 years, at least a significant minority are always worried about the economy.
Worry depends on how companies improve their stock performance. Depends on the P&L statement. If companies reduce expenses e.g. labor costs, then 43% of employees are worried. If companies increase income e.g. sales, then happiness. Quo Vadis?
No question. In fact, I would say 43 percent is a pretty low number. Probably almost that many believe the world is coming to an end sometime in the next month. The older I get, the more the news just seems like a series of endless reruns, only the names change.
"The bottom line of all this for investors is that the risk isn't the economy; it's politics."
Great post! Thanks for sharing!
"It's a reality that, with the emergence of China and India as economic powers, the world's labor supply has suddenly been vastly increased. That drives down the world-wide cost of labor. At the same time it bestows fabulous rewards on the entrepreneurs who figure out how to capitalize on the dynamics of our new global business environment."
Well, those with jobs & Google & Apple stock are happy. Many small cap stocks are at 52 week lows (i.e. mine). I have a computer whiz friend who is having no luck in finding a job.
Entrepreneurs who figure out.....translation: "fire their USA employees and move production to China/etc". My Mom-in-law lost her job when the Company shut down it's USA plant and moved to China.
If my wife's employer did the same, then she'd be out of a job.
Health care costs rocket, gas is way high, no end of new taxes/fees here, business profits way up due to outsourcing to China/India/other 3rd world country...at expense of USA workers. Illegal immigration high and anyone with a brain knows Congress or anyone else in power positions has zero desire to enforce the law. DOW is way up....ever hear of buying low, selling high?
etc etc Plenty of fuel for a wall of worry. Ever consider that the worriers may have a point?
"Health care costs rocket, gas is way high, no end of new taxes/fees here, business profits way up due to outsourcing to China/India/other 3rd world country...at expense of USA workers. Illegal immigration high and anyone with a brain knows Congress or anyone else in power positions has zero desire to enforce the law. DOW is way up....ever hear of buying low, selling high?"
The article seems to paint a slightly different picture. But I get your point. There used to be more integrity in corporate America. I'm sorry your family has felt the pinch of the greedy.
No fooling.
The double-talking conartist has kept this lame horse economy plodding along by whipping it with over $2 Trillion of deficit spending while downsizing and outsourcing our wealth-creating industries. It won't be long before the horse collapses from the addition weight of debt.
"I am one of those who do not believe that a national debt is a national blessing, but rather a curse to a republic; inasmuch as it is calculated to raise around the administration a moneyed aristocracy dangerous to the liberties of the country."-- President Andrew Jackson - (1824)
Gee it could NOT have to do with the fact that the Junk Media does NOT report the truth of the Economy? That the junk media presents EVERY good economic news point with negative spin? Hey Jackas$ "journalists" try reporting the FACTS with NO negative spin. Funny how you all gushed over any good news when Clinton was Pres. Liars and scum the lot of them.
Thank you for demonstrating a COMPLETE Economic Illiteracy Willie. Cannot decide which is more amusing your complete ignorance or your hysteric determination to share you economic illiteracy with EVERY Freeper you can reach. Amazing how the most ignorant are always the most rabidly Messianic in spreading their ignorant, bigoted, views.
Aside from name calling, Willie was wrong because?
If Americans are worried about their future,why are they spending so much?
If you are worried about your future, wouldn't you begin to cut back on spending, and increse your savings?
How does it work, I am worried that my job may not be there next month, so let us max out our credit cards?
If true, it is a mixed signal.
I suspect it is the way the question is asked that determines the way people answered. As they say, follow the money to see what people really believe about the future.
Complete Economic Illiteracy. Every thing he says, even the deficit number, is completely with out any base in fact or economics. It is rabid stupidity to go out and pretend to be an expert on economics, as Willie does, if Willie cannot even get the NUMBERS right. Sorry, I but I am not real interested in validating the emotional hysteria of the rabidly ignorant Economic Isolationists. The LEAST you all could do, if your going to be so Messianic in the fraudulent doom and gloom pronouncements about the Economy, is get the FACTS straight.
People in low skill or unskilled jobs need to wake up and get job training that will provide them with the skills employers want. The Skilled Jobs section of the want ads here in Milwaukee is full of good jobs if you can weld, operate machinery, etc.
"This frustration is probably most intense among working-class Americans, who've experienced fairly stagnant incomes — at least after adjustment for inflation — over the past five years. When you take into account lower tax burdens and the increased value of employment benefits, income growth doesn't look so bad. But in pure cash terms, working-class salaries have gone nowhere for five years, and that's a frustrating thing when at the same time some have become so famously and fabulously rich."
This part of the article seems true. What was a middle class income even two years ago is now at the poverty line with the cost of energy, housing and medical. I am not ashamed to say that I made $100k last year and I live in Maine. It's comfortable but I know two years ago I would have felt rich. I am frugal on what I buy on credit (two used but nice cars) and my mortgage, but saving now seems a lot tougher. A lot of my friends have a combined income of $60k-$70k and are really tightening their belts of going out to eat, paying off credit cards, vacations etc. They are debt laden and drowning. I guess I was one of the few who figured out the true cost of living rose 50% a year ago and started cutting back then.
That right there is the cottonpickin bottom line!!!
I heard somewhere that this deficit was needed to pay for our trade deficit. Of course anyone who said that is economically illiterate.
Well stated BUMP!
What about taking into account assets??
From people I talk to, the worry is mainly because everything costs so freaking much! Especially energy.
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