Thursday, April 10, 2008


The ongoing debate of recession or no recession is a red herring. Without a doubt, the housing sector has been in a recession. Other sectors are on the edge of recession. At the same time the booming US export business is keeping the overall economic numbers well above recession levels. While I still consider the odds better than 50/50 that the US will make it through this down tern without entering an official recession, the truth is that it does not matter. It is the talk and belief of recession that is playing with the psyche of investors.

The steady stream of "false news" is kicking a man when he is down. As Professor Mark Perry has pointed out on his Carpe Diem blog the two stories are bumping heads. On the one hand, the story has been repeated that the economy is in trouble because the credit markets have frozen up. On the other hand, the published data from the Federal Reserve Bank in Saint Louis shows that bank loans, commercial paper "loans" and leases are all expanding rapidly as they would do in a healthy economy. Mark has posted the real estate loan report which shows growth at the annualized rate of about 10%!


It should always be remembered that the stock market leads the economy by an average of about 9 months. The market bottom made on January 21, 2008 implies that the economy will be jumping ahead by November. That is consistent with election year politics. The incumbents are throwing money at housing, at investment banks and the public. The $600 checks will start flowing within a couple of weeks or so.

The Crystallbull web site has posted a chart that shows the battle of the CPI versus the PCE. The PCE is the feds measure of inflation and the CPI is the news medias measure of inflation (the official government measure). About the start of an economic slowdown, the PCE measure typically falls rapidly relative to the CPI index and the stock market takes off about the time the CPI turns to follow the PCE down. These events have already happened this time around. The market has jumped up off the bottom, the PCE is below 2% and the CPI peaked at around 4%.

The economy is ready for the big dance. There is a lot of nervousness in the air but I believe she is ready to dance.