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 http://bigpicture.typepad.com/comments/2006/04/gdp_up_wage_sta.html