August 10, 2011


It's Not the Economy, Stupid!: Yesterday's flash rally, following Monday's flash crash, demonstrates the truth of today's markets--they no longer reflect economic reality on the ground. (Zachary Karabell, Aug 10, 2011, Daily Beast)

The sell-off that began last week brought out a host of commentators who jumped on the bad news of the markets and used that to tell grim stories of a global economy on the brink. Sell-offs produce bad news the way sinking ships produce rats; on days of vertiginous decline, the odds of hearing someone preach the gospel of growth and prosperity are decidedly slim.

It was no surprise to see Nouriel Roubini burnishing his brand as Dr. Doom on Monday, warning not just of a recession in the United States and a near-collapse of the Eurozone, but also a sharp slowing of global manufacturing stretching from China through India, Brazil, and Germany. One analyst on CNBC, cheering on the rise in gold prices, predicted that the financial system would soon become so perilous that the president of the United States would be forced to confiscate European gold holdings stored in the vaults of New York in order to maintain American economic viability once cash currencies collapsed completely.

Even facts were subject to the optic of impending collapse. China released a raft of economic data late Monday night, showing inflation at an expected 6.5%, industrial production up 14%, and retail sales up 17%. That sounds like an economy charging ahead - and in a fast-growing economy, you want healthy inflation (not too much, but God forbid too little) to augment domestic spending. But one Goldman Sachs analyst out of Asia captured Wall Street sentiment perfectly when he described the data as proving that China was "weakening." Why? Because industrial production was expected to reach 14.9% and retail sales were shy of the predicted 17.7%.

Only in the midst of a sell-off tinged by group-think could these numbers be made to be bad. Yes, China is likely slowing relative to periods of even more torrid expansion over the past five years, but so what? It is still consuming global commodities with a nearly insatiable appetite and in turn focusing on domestic markets and innovation (including a move toward renewable and alternative energy parallel to its voracious consumption of carbon). The sell-off in equities and China's own discontent with its dependency on the U.S. dollar did nothing to alter any of that.

And as for the looming U.S. recession that generated a bandwagon of consensus so full it's a wonder it didn't tip over, Disney reported results that showed its theme parks did 12% more business, and ad sales were up healthily in its entertainment divisions. That matched reports of other media companies that saw better ad revenue over the past months. Ad revenue and theme parks don't see those trends unless domestic consumers are spending money; companies don't increase advertising budgets on slumping sales, and theme parks don't fill with bodies if people can't spend.

The reality has been and remains that part of the United States is mired in recession, depression, or whatever word you wish to use for a protracted period of stagnation, unemployment, declining wages and waning spending power. A numerically smaller portion is thriving, and a very small portion is really thriving. Whether the "economy" grows 2.5% or 0% for the next year won't change that reality, and all the recent analysis about whether we enter a recession misses the point that the recession never ended for tens of millions and hardly ever existed for millions more.

Posted by at August 10, 2011 7:31 AM

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