They Do Ring a Bell



There’s an old expression on Wall Street:  "They don’t ring a bell at the top."

Actually, they do; Its just hard to see at the time.

The credit or the blame for today’s sell-off goes to a front page article in the WSJ last week "Behind Surging Stock Market: Old-Fashioned Economic Boom" – was pretty much a gong ringing.

While I say that partially in jest, the day that came out (5/11/06), my email hostility meter went vertical, with many of my bullish colleagues emailing that to me (I dunno how they managed to type and pound their chests at the same time).

It didn’t seem overtly incorrect at the moment, but the reaction to it was quite telling.

Here’s an excerpt:

"After Hurricane Katrina hobbled economic growth late last year and as oil prices soared, many investors thought the economy, corporate profits and the stock market would be running on empty by now.

Instead, an economic rebound has sent corporate profits to an 11th consecutive quarter of double-digit gains, the longest streak since at least the 1950s. Surprisingly strong growth in the economy and corporate profits has shaken stocks out of their doldrums. The Dow Jones Industrial Average is now within sight of its record close.

Unlike the great 1990s bull market, which was sustained by a wave of new technology, this one has the feel of an old-fashioned economic boom, the type investors saw in the 1950s and 1960s. What many thought would be a limited rebound created by Chinese industrial demand has turned into a long-running story as once-unloved sectors such as commodity producers and oil drillers continue to thrive. Helping fuel the U.S. stock surge are once-skeptical investors, who are now funneling money into the market in the hope of getting in on a lengthier boom.

Despite yesterday’s 16th consecutive interest-rate increase by the Federal Reserve, the Dow industrials finished at 11642.65, up 2.88 points, just 80.33 points short of the record hit at the height of the technology bubble on Jan. 14, 2000. (Markets often take a short breather in the face of milestone numbers.) After falling a little less than 1% last year, the Dow has risen 8.6% in 2006. In total, it’s gained almost 60% since the bear market ended in October 2002 with the blue-chip average at 7286.27."

Here’s the para I took issue with:

"The situation resembles the Goldilocks economy of the 1990s —
not too hot, not too cold — with inflation moderate and economic growth
downright strong. The annual economic-growth rate hit 4.8% in the first quarter,
the fastest pace since 2003. Compensation costs for employers rose only 0.6% in
the first quarter, the smallest quarterly gain in nearly seven years."

Towards the end of the column was the erroneous Street meme, that goldilocks nonsense I have been specifically pushing back against for some time now.  As I’ve been writing, inflation is far from benign. Further, the Q1 GDP was quite misleading; As we discussed in April:

"As expected, GDP was up nearly 5% in Q1 2006 — the 4.8% rise comes on top of the "tepid" 1.7% gain in Q4. Once again, many people wrongly reach concIusions from a single data point: With the aftermath of Katrina and Rita disruptions, the loss of shipping down the Mississippi, and the shutting down of refineries and off-shore platforms, the hurricanes and loss of New Orleans was the specific cause of the 2005 Q4 number.

Similarly, the pushing forward of production and consumption from Q4 into Q1 explains the big pop in Q1. If you want to know what GDP is actually, use some common sense and average the 2 quarters:  GDP is growing about 3.25%. Same for durable goods: It spiked at a 20.6% pace in Q1 versus plummetting at a 16.6% rate in Q4 ’05. You should not need a Ph.D in Applied Mathematics to figure out what happened . . .

For the reality-based dwellers of the real world, put aside the
CPI measured inflation fiction and consider actual cost of living
increases: your purchasing power was down between 5 – 10%."


Behind Surging Stock Market: Old-Fashioned Economic Boom

Defying Gloomy Predictions, Profits Rise, Prices Don’t;
Dow’s Record Approaches The Return of ‘Goldilocks’

WSJ, May 11, 2006; Page A1

GDP Up, Wages Stagnant   
The Big Picture, Saturday, April 29, 2006

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Barry Ritholtz commented on May 17

    You think that is gloating?

    You’ve GOT to be kidding me . . .

  2. douglas commented on May 17

    “Compensation costs for employers rose only 0.6% in the first quarter, the smallest quarterly gain in nearly seven years.”

    The consumer is tapped out, his wages are stagnant, the credit cards are maxed and the ARM that he used to do a cash out refi has adjusted. Junior wants to go to a college that costs as much as the house and the minvan needs $80 of gas. I keep coming back to one word: unsustainable.

  3. emd commented on May 17

    wow…. this is getting downright ugly…. finally a good week for us short sellers!

  4. kvenlander commented on May 17

    Please think of the stock market implications of this:

    Ordinarily, a company that conceals their transactions and activities from the public would violate securities law. But an presidential memorandum signed by the President on May 5 allows the Director of National Intelligence, John Negroponte, to authorize a company to conceal activities related to national security.

  5. Mark commented on May 17

    Damn “sam”. If Barry can come in here and show his butt when he makes a bad trade or a bad call, he sure as hell has the right to smile when he’s proven correct. Gloat away I say! (and it’s not).

  6. Bob A commented on May 17

    What’s really worth commenting on is how most of the folks at monkey money, bubblevision, etc pretend they never had any reason to think something like this might happen.

  7. Jordan commented on May 17

    We are in a recession. If inflation was reported correctly then it would be obvious to the masses. Any nominal growth is 100% inflation at this point.

  8. Idaho_Spud commented on May 17

    Barry – How about “Whackage, Part II? :)

  9. sam commented on May 17

    actually, that was a kinda compliment to Barry (and i shared his bearishness all along)…Barry , i believe, doesn’t think housing will have a huge impact later..but i think he is very optimistic on that front.

  10. miami commented on May 17

    Nominal personal income is up almost 7% in four months. [annualized.]

    How on *Earth* can you call that ‘stagnant wages?’ A lotta people here love to talk their book no matter how illogical and nonfactual.
    If 7% is stagnant, what do you consider ‘solid’ wage gains?

  11. The Nattering Naybob commented on May 17


    Great call, but for whom does the bell toll??

    May 11th could be well remembered, it was 6 weeks and 1 day after the end of the last yield curve inversion on 03/29/06.

    In 2000, the yield curve inverted 01/26/00, the market started to flip over 03/10/00, 6 weeks and 2 days later.

    The difference this time is that the flip waited until 6 weeks after the end, rather than from the start of the inversion.

    Coincidence, maybe, maybe not. 5 straight days down and a major butt slamming today are giving me a case of deja vu all over again…

  12. douglas commented on May 17

    “Nominal personal income is up almost 7% in four months.”

    Gee has the market been up the last four months?

    You know the joke. Bill Gates walks into a bar . . .

    I look at median household income. And it’s ugly.
    It fell 3.6% from 2000 to 2004.

  13. Idaho_Spud commented on May 17

    Just curious: How does one confidently post that personal income is up 7% in the past six months when the latest BLS data is dated August 2005?

    Is there a link to the data?

  14. douglas commented on May 17

    Idaho_Spud, even if the 7% is accurate consider that nominal personal income includes all sources of everyone’s income. It’s pretty easy to see how this number can be skewed.

  15. mike commented on May 17

    they don’t ring a bell at the top — umpteenth time I’ve heard that this week…..just wanted to share with you something a guy on the floor said upon hearing that phrase. He looked at me and said:”I’ve got a fever….and the only cure is MORE COWBELL”

    (old SNL reference:

    sometimes you just gotta laugh in a tape like this

  16. HM commented on May 17

    One quick observation — inflation is factored into the GDP numbers. If the official CPI figures are understating the true rate of inflation, then the “real” rate of GDP growth is being overstated.

  17. DBLWYO commented on May 17

    Well actually if we could return to looking at real GDP data and smooth it by examing YOY% changes Q4 was 3.22%. Not quite as simple and elegant as the Ritholz eyeball algorithim but calculable from the readily dloadable data.

    On the same basis GDP has shown a steady downtrend since Q104 when it was 4.67% YOY to now. Would this not indicate a slowing economy, indeed ?

    Nor would it therefore be surprising that the US indices have been relatively flat (according to even the headlines) since Jan04 (& Jan02 and Jan98 for that matter).

    On the other hand one has to sympathize with E.J. who simply wrote the nice article he was told to investigate which reflected the headline based and street-inspired consensus “data” ? It might also be worthwhile to ask any local businessman a) what he’s seeing for his customers and b) how his profits have been responding over the last two years as energy-based, cost-push inflation has eroded profits ? And is now eroding consumer demands ?

  18. Declan Fallon commented on May 17

    “How on *Earth* can you call that ‘stagnant wages?’ A lotta people here love to talk their book no matter how illogical and nonfactual. If 7% is stagnant, what do you consider ‘solid’ wage gains?”

    I don’t know what “*Earth*” your on, but you are obviously not a wage earner in recent times, or if you are I would like what you do since grassy objects are obviously a solid green tone over the barbed wire fence that separates us. I can only speak for myself, but my wages have barely budged over 2 years.

    Lets see how illogical or unfactual I am as a member of the “lotta people” brigade;
    I earn a salary above the median (Whoppee!).
    I pay below market rent (thankfully!).
    I drive a stunning 1989 Toyota Camry (drives great!).
    I own a TV more suited to holding goldfish than plasmalysing my wall.
    I have savings and liquid assets (unlike many Americans).
    I have credit card debt which is been paid off more than it is used, but I have no mortgage, no car loan and no student loan.

    I look at house prices here in Hawaii and laugh? A mortgage for the cheapest of the cheap (in condo land) would consume almost 40% of my net income (I won’t go into utilility costs). I have not seen more than a 1.5% wage increase annually and I am pretty certain the same goes for cops, nurses, teachers, bus drives, garbage disposal workers etc. But who needs these people anyway?
    I see plenty of new cars on the road. I know and I can’t afford to buy one – so how does anybody else? Hmmmm.. cheap finance.
    When I hobble to the local mall and see how many tweens carry IPods, mobile phones and Ab+Fitch clothing – who pays for that? At least I am not a “totally lame” in that I have a phone. Luckily, I have no tweens or sprogs of my own so I don’t have to worry about that (yet!) – so more money for me!
    How about that car for the 16th birthday? Please Daddy…Pleeeeaaasse… (“No, I don’t want that horse and cart you have parked in the front”). No worries for me there either.
    Or that third level education you were relying on the stock market to pay for? Oh those multi-year highs in the Dow (‘Nasdaq sold seperately’) gave everyone a glimpse of their kids college account value back in the good-ol-days of 2000 (except slightly lower and now falling, again). I hear the Army is good at this time of year.

    Now lets factor in the inflation, which doesn’t exist as long as you remove all the factors on which you spend money. It was reported in the local news recently that Matson increased their shipping charges (again!); the effect of this is best seen on the food shopping bill, but *everything* is transported one way or the other, so the price of *everything* increases – not just in Hawaii. $3.30 a gallon don’t bug me (yes… I’m one of those pesky “Europeans” from a land of $6 gas) and my old Camry doesn’t cost $80 to fill.

    But of course, GDP is great and wonderful and the economy is booming???? Higher prices = Higher profits = great, but who can afford to keep buying these higher prices now the days of cheap finance are gone?

    Now, I am patient person and will eventually relocate somewhere cheaper (and colder), but when I see nit picking statistics which belong to a reality other than one now, I just have to respond.

    Yours in penny pinching mode,

    P.S. All donations welcome :)

  19. Charles commented on May 17

    When did prior quarter GDP growth ever become a leading indicator for equities???

  20. miami commented on May 18

    ‘I look at median household income. And it’s ugly.
    It fell 3.6% from 2000 to 2004.’

    Let’s see – The rich got poorer and made less during 2001-2004, and the average, poor, and middle-class Americans all made more money.

    NYTimes, Feb 24, 2006 []:

    “The savings of people at the top 10 percent of the income scale declined by 6 percent, …their income, on average, fell by about the same proportion.

    (Meanwhile, the typical American’s income rose by 1.6%.)”

    Top 10% average income fell by 6.297% according to the FRB survey of Consumer finances.

    The poorest 20% made 1.8% more over that time frame.

    Never thought I’d see the NYT admit the poor got richer and the rich got less.
    All numbers are real, that is, inflation-adjusted.

  21. douglas commented on May 18

    Miami, all those things you listed can be explained or work against your argument. Wait until this fall when the government numbers come out. As an exercise, go to and HR compensation executive and ask what kind of wage increases have been given over the last year or so. They aren’t going to tell you 7%. Look at payroll numbers. I am not sure the “rich”, as you call them, did make less between 2001 and 2004, but you are conflating income with wages. And what did the market do during those years? I am only trying to make a simple point. Look at median household income, median house price, the price of a new car. Then look at child care costs, healthcare costs, education costs, energy costs and the numbers don’t work. Now look at the current account deficit and the market fundamentals. Now, is that a healthy economy? Could you raise a family on the median income or even twice the median income? And yes, that’s my book and it’s solid. See ya, gotta go get my 7% from my boss . . .

Posted Under