Economic growth is strongly related to confidence. When CEO’s get worried, as they did after the demise of Lehman last Fall, they cut costs first and ask questions later. Economic confidence is closely tied to employment, a topic we follow closely at “A Dash.” Employment indicators often lag actual economic progress when employers are quick to fire and slow to hire.
We do not all share a common interest. It would be nice to think that all hope for an economic recovery, but that perspective is mistaken. Here are some obvious exceptions.
Perhaps in a perfect world there would be a few years in a political cycle where everyone in the country all pulled together. It occasionally happens when there is a specific and imminent common enemy — after 9-11 for example. Most of the time private motives dominate over the public interest.
Quite frankly, there are many who hope for the economic recovery plans to fail. There are strong partisan reasons. The most important members of this group are running for office in 2010. Their personal stake is huge. There will be a constant barrage of partisan economic criticism.
Bearish Pundits, Commentators, and Fund Managers
There are many who stand to profit from a market decline. The many bearish pundits have credibility and book royalties on the line. The commentators have prestige, jobs, salary, and bonuses at stake. Sometimes personal motives outweigh a national interest.
Some hedge fund managers have aggressively short positions. Anyone paying attention knows that these positions are always supported by the Bearish Blogging Network (BBN) where there is direct or indirect compensation for supportive bloggers.
With so many providing so much negative commentary, it is easy to be led astray. Let us consider a specific example. The Fed Balance Sheet
A good way to begin is by removing the most obvious issue, question #4 from our quiz. Information about the Fed balance sheet is readily available, specific, and timely. Those taking a bearish viewpoint have emphasized the growth in the Fed balance sheet, including loans to various financial institutions. The critics have suggested that this growth was part of the Obama Administration efforts and also that it puts taxpayers at risk.
Here is a recent report from Macroblog, one of our featured sites:
There are three key facts from this report:
- The increase in the Fed balance sheet dates from the Lehman failure and the aggressive response, not from the start of the Obama Administration.
- The overall size is declining slightly.
- The distribution of assets has shifted from the riskier short-term lending to non-bank financials, moving to agency paper.
From a public policy perspective, the Fed has attempted to restore what we refer to as “normal lending”. The Fed recognized a market failure, where credit markets seized up. This step is aggressive and temporary.
From an investment perspective it is crucial to understand the nature of the policy. Some portray the balance sheet expansion as a “bailout” or an unlimited commitment. This portrayal is calculated to frighten the individual investor. It it not accurate.
Restoring confidence will be an uphill battle. It begins with better understanding of the policy.
Full disclosure: Our current posture, reported weekly, is bearish, reflecting market sentiment. We see the bearish case as overstated, but realize the evidence will come one piece at a time.
We are working to find the catalysts for a changed perspective.
Originally published at A Dash of Insight and reproduced here with the author’s permission.