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Cats, Reptiles and Recessions
by Mark M. Rostenko
Editor, The Sovereign Strategist
September 26, 2004

Stocks retreated last week with all the major indices skidding to multi-week lows. The dollar slipped as well but remains tightly range-bound, while gold edged up a bit. And crude oil rallied toward $50 per barrel again while the smart guys running this country and its finances continued to scratch their heads, still bewildered but not bemused about being wrong over and over and over again.

The S&P 500 backed off sharply last week after bumping up against the upper boundary of its 2004 trading channel. It was the same story it’s been all year: Hit the bottom and reverse. Hit the top and reverse again. Like clockwork.

Naturally the dingbat media had all manner of explanation for the market’s sudden change of heart. Fears of higher crude oil prices. Fears of higher interest rates. Fears about the election. Fears that Alan Greenspan will peel off his forehead and reveal himself as a reptilian on holiday from another solar system. Same garbage, different day. Like clockwork.

Surprisingly enough, the market failed to rally on news of Cat Stevens’ deportation. We can all breathe more freely and safely knowing that this vicious, bloodthirsty, terrorizing POP-SINGER and (undoubtedly) eater of small children is well beyond our borders. And yet the market wasn’t fazed.

What gives? No explanation from Reuter’s, frequent purveyors of the “market down on terrorism fears” line. You’d think it have been up on news of a severe reduction to the terrorist threat. Perhaps we need to lock up Britney Spears? I know I’d feel much better, if not safer...

Amidst all that ballyhoo, long-term interest rates slipped to 5-month lows. While Uncle Al was busy reloading his “interest rate slashing machine” with another trivial increase, the CBOE 10-year Treasury Yield Index slipped to 3.963%, a level last seen in April. Seems that the market either doesn’t see an inflation threat or doesn’t buy Al’s spin about the economy “gaining traction.” I vote for the latter.

Why? Because it’s bloody obvious. Think about this folks: we’re almost three full years into the so-called recovery and according to Stephen Roach of Morgan Stanley, we’re about 8 million jobs short of where we should be, based on the six most recent recoveries. This is “gaining traction”?

We all know that the consumer makes up about 2/3 of GDP. In order for a recovery to have traction, the consumer needs to have money to spend. Again borrowing from Roach’s data, wages are up about 2.2% over the course of this recovery. In the previous six recoveries we stood at 10.6% by this time. Nonfarm payrolls are up 0.3%, versus the 7.8% average. This recovery that is gaining traction?

What about business fixed investment? Doesn’t a $108 billion gain from last year’s third quarter through this year’s second quarter suggest we’re out of the slump? Not according to Dr. Kurt Richebächer who attributes the bulk of the gain to the Fed’s Mystico-Magico Hedonic Pricing Machine. (I made that up, not the good doctor.) 

You remember hedonic pricing, don’t you? That’s when a company spends, say $100,000 on computer equipment and the Fed’s team of mathemagicians asserts that “Yes, but these are NEW, really really fast computers. Sure they only cost $100,000, but compared to the old computers, they’re worth BILLIONS AND BILLIONS!” And voila! We have $108 billion in fixed business investment!

According to Dr. Richebächer, industrial spending was “virtually stagnant.” Therefore, we can attribute much of the gain in business investment to hedonic mumbo-jumbo. So much for government statistics. Once again...

The writing’s on the wall, folks. Long-term interest rates are falling. Retail sales are slumping. The consumer isn’t making more money and the government is only making up job numbers. Are we in for another round of recession? Before you answer, consider that crude oil is approaching $50 again and one of these days it’s going to surpass it. Oil shocks = recessions.

Of course, the economy is rarely that simple. If only there were one simple indicator that revealed the future. But we’re not looking at rising fuel prices in isolation. There are plenty of other stressors in play as well, some of which have already been mentioned.

Another recession? I don’t know. I don’t know because decades into this business, I still don’t know what the hell a recession is because the clowns who identify them don’t know themselves. Remember the last recession that was a recession but then after it was over it turns out it wasn’t really a recession? Go figure.

I’m a simple guy. I value the obvious and common sense far more so than statistical mumbo-jumbo and silly data spewed by academicians who never had to make a living in the real world. Common sense makes one thing abundantly clear to me: we’re not gaining traction.

Recession, depression, I don’t know. But economic boom times accompanied by fat stock market gains? Yeah. And Cat Stevens is packing nukes in his violin case...

© 2004 Mark M. Rostenko
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