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Stock Ideas Investors Daily Edge The Battle for a Recession
Stock Ideas Investors Daily Edge The Battle for a Recession 
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'Stimulating' session to end a very ugly week. - GE, IBM prevent early selloff, but cannot turn the tide. - Leading indicators remains weak while consumer sentiment bumps higher. - Stimulus proposal stimulating the usual debate. - Hard to stay long this market outside the relief moves as even defensive sectors come under pressure. - Earnings start in earnest and may trigger the rebound, either by good news or bad. |
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| The Battle for a Recession |
| Saturday, 23 February 2008 | ||||||||
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Dear Reader, This past week, Forbes writers Marc Babej and Tim Pollak opined that “The government may not yet have declared a recession, but millions of households have.” That’s the media’s tune. But in most of our households, we’re more likely to notice the escalating price of groceries and health insurance than to be worried about our jobs. Why are the media focused so long on the recession instead of asking why no one has been able to see double-digit inflation? After all, a gallon of milk is nearly 20 percent more expensive that it was a year ago. And though oil has galloped from $40 to $100 and enters the cost of everything, including driving to work, no one has asked, “where’s the 14-percent inflation rate we should be expecting under these conditions?” An analyst who I would credit if I could find the quote again recently stepped out from the pack and said, “it’s almost as if everyone has decided to have a recession.” You have to admit recession was a far-fetched notion when prices continued to rise, employment stayed high, and consumer spending roared along. But the media have been predicting one for four years. Some of the signs they report to build their case seem a little desperate - a compilation of stories meant to convince us. Reuters, the wire service, says the problem is global. As evidence: the Japanese are cutting back on potato chips and beer, Americans are going less often to the steak house for dinner, and the peasants are eschewing pig now that pork is up 60 percent in China. I’m not sure how many Japanese buy potato chips, but steakhouse trips are a weird metric. Ken’s Steak House (yes, that world-famous salad-dressing Ken’s) near where I live has been running on half empty for years, even without a recession lurking. Measure how many Americans order pizza or go out for Mexican and you’d have a trend I’d believe. And as for the price of pork in China, that’s so easy it’s a hoot. Dear Reuters, have you heard about the Olympics? China’s swamped with tourists already. Now which Chinese delicacy do you think all those extra American and European visitors are going to order - the smoked duck feet? The chicken knees? Or nice, familiar pork? I’ve had them all, and I definitely go for pork. So restaurants have nabbed the supply and the poor peasants are finding pork’s out of their budget this year. Recession has nothing to do with it. Still, the recession buzz has reached liftoff and hurtled skyward. At last, it seems the media have won the battle for recession, and the believers among us have decided to shut our wallets and let it come. Why in the world would anyone choose recession? Ask any man on the street what’s worse - recession or inflation. If he answers inflation, his name is probably Alan Greenspan. Every regular Joe thinks recession is scarier. He might lose his job. But among economists, inflation is the scariest beast. If you want to know why, consider Stanford. This week, Stanford University abolished tuition for students from homes earnings less than $100,000. Some people may take that as a sign that $100,000 incomes aren’t as impressive as they used to be. But here’s what I find interesting: Stanford’s only making this move now before its critics get it by the neck for sitting on huge endowments. The tuition reduction, though splashy, isn’t half as significant as the tuition inflation that preceded it. In the past 10 years, Stanford University increased its tuition by 68 percent. Do you know what the official inflation rate was? In the same span, the consumer price index rose only 29 percent. And wages increased only 13 percent. That’s why economists fear inflation. The official numbers seem like something we can all handle. But in reality, things are much worse. Anyone who sells anything will use the consumer confidence that prevails during mildly inflationary periods to raise the price as much as the market will bear. If you’re selling oatmeal, that probably doesn’t come to a lot at any one time. But if you’re selling a scarce resource like admission to Stanford or a “gotcha” item like car insurance, the market will bear much more than the nominal inflation rate. In addition, once prices rise, they are strongly resistant to falling. Inflation is a lot stickier than deflation. If the price of corn rises, Corn Flakes go up. Consumers understand. And when the price of corn falls, the price of Corn Flakes stays up. The current discussion of the housing bubble, the Fed’s slowness to lower interest rates, and the new threat of inflation on top of recession is a lot of hocus-pocus. Inflation has always been the big problem. Period. Media’s fascination with recession is just a nuisance. Inflation was the reason the Fed was so slow to lower interest rates … so slow it wasn’t enough to prevent the real estate bubble from popping. You think that was an accident? I don’t. Letting it pop was the single easiest way to pull a highly inflationary force out of the system before the “official” numbers started to look like the reality you and I actually live with. A bubble pops, and maybe a small recession will ensue that offsets the inflationary force of the bubble. To an economist, that’s not so bad.
As Carnegie-Mellon economist Allan Meltzer put it, “Capitalism without failure is like religion without sin. It doesn’t work.” Please ignore the media noise about how the Fed has been tolerating inflation just lately as it lowers interest rates to get the economy moving and head off the awful specter of recession. Inflation isn’t suddenly making a threat to us … it’s already been here for years. And given the price of oil, housing, and commodities, the official rate should have been much, much higher than it was these past few years - Stanford University high. So why are Bernanke and crew now lowering interest and courting inflation? The credit crunch talk got a little too wild. The economic slowdown that the Fed engineered by ignoring the bubble until it popped created a feverish overreaction. A little interest-rate medicine should fix that, it hopes. The Fed may even lower rates one more time at the March 18 Open Market Committee meeting, but that should be the end of the road. After that, look for rates to rise again. Inflation is still the issue. It always has been. But a nice neat little recession would sure work wonders. Respectfully, Lynn Carpenter P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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