James Srodes Rain or shine

JAMESSRODES | Veteran commentator on Washington & Wall Street

Rain or shine

How solid is the US recovery?

“Happy Days are here again! The skies above are clear again. So let’s sing a song of cheer again. Happy Days are here again!” Franklin D. Roosevelt’s campaign anthem during the Great Depression of the 1930s.

While Cheerleader-inChief Barack Obama has wisely refrained from trying to lead America in a rousing chorus of the Democratic Party’s signature campaign song, it is clear there is a concerted effort these days to portray the US economy as poised to resume the ebullient prosperity of another time.

The professional media commentariat has done little else over the past month but stress that there are enough convincing signs of an impending American economic recovery from the doldrums of the last six years. And there are plenty of straws in the wind to grasp. Wall Street share prices boom. Motor car production is at a recent high, sparked by productivity gains that generate truly glittering profits for the big car makers. Home prices are rebounding with a resulting revival of new home construction.

Yet events of just a fortnight ago shows just how dark the clouds remain hanging over the American recovery. While it may not rain right away on Mr Obama’s parade, it is too problematical for him to keep trying to take a victory lap. It is too much to suggest that President Obama is relegated to the political sidelines for the remaining two years or so of his second term. But it is increasingly clear that the man in Washington with the most direct control over the fate of the nascent recovery is Federal Reserve Chairman Ben Bernanke.

Just witness what happened on June 19 when Chairman Bernanke ended two days of meetings with the Fed’s policy making Open Market Committee with a rather sad plea that the news media and Wall Street’s market analysts try very hard to listen to precisely what the FOMC had concluded. “We are determined to be as clear as we can, and we hope that you (the media) and your listeners and the markets will all be able to follow what we are saying.”

What the US central bank was saying was that the recent, albeit modest and fragile, upturn in economic activity was expected to continue on an upward, albeit fragile, path through next year. And based on those expectations the Fed was raising the mere prospect that sometime in the distant future, it was prepared for an orderly reduction of its $85 billion per month purchases of long term bonds which were intended to keep interest rates low and to provide lending capital to spur economic growth. While the so-called Quantative Easing programme has spurred a modest uptick in the housing and motor car markets, its overall effect has been to force banks and other money market managers to hoard capital which they have diverted into a stock and bond market bubble at home and risky ventures abroad—mainly in China. Bernanke went to great lengths to stress that the QE programme was not about to end, but that in the future it might be scaled back in orderly increments as economic growth increased.

But all the market analysts could hear was the ghost of William McChesney Martin, the long-serving (1951–1970) Fed Chairman. Martin famously said the central bank’s job “is to take away the punch bowl just as the party gets going.” But there is no prospect that Mr Bernanke is about the grab the punch bowl between now and 2016; it is just that he may not continue to spike the punch so lavishly and may even water it down a bit. Nonetheless, the bears of the global share markets went on a short-selling binge that soaked billions out of equity values on all major exchanges. When coupled with a Beijing-induced banking crisis in China, that addictive punch bowl of stimulus suddenly did not look quite so appetising to the party goers.

The real economy

While investment markets probably will regain some of their aplomb in the weeks to come, it is past time to reconsider just how solid the American recovery is and is likely to be over the next 18 months. Take the motor car industry—long one of the three legs in the tripod of American industrial power (housing and heavy machinery being the other two). Much is made of the fact that car sales are projected to hit 16 million vehicles this year, an improvement to be sure over 2012’s 10.7 million sales. But nowhere near the 24 million cars sold in the US 15 years ago. And while car makers report their plants are running full tilt, gains in productivity and robotics have not revived the industry’s employment of workers. Detroit’s car makers once employed 1.4 million highly paid workers; now there are fewer than 700,000 car jobs and many of them are at reduced wages.

And while Chairman Bernanke was right to beg sober consideration of the Fed’s policy decisions, it also is worthwhile to identify some of the leading bears who have been dumping some of the bluest of Wall Street’s blue-chip shares. In recent public disclosure reports, no less a traditional stock market cheerleader than Warren Buffett disclosed he has reduced his Berkshire Hathaway holding company’s portfolio of ‘consumer product stocks’ by a whopping 21 per cent. Another billionaire share enthusiast, John Paulson, has reversed his position on banking shares, dumping 14 million shares of Goldman Sachs, along with many of the same consumer shares. George Soros too has gotten rid of nearly all of his bank stocks, including JPMorgan Chase, Citigroup, and Goldman Sachs, nearly a million shares in all.

One has to ask what these men know that President Obama does not. n