Our Economy Is on Steroids
And some side effects have already surfaced.
The stock market is behaving as if the history of the last 20 years is about to repeat itself: Recession will turn into a robust expansion. Stock prices are discounting an expectation of robust earnings recovery to a level only slightly below the pre-financial crisis level, and risk-taking is in vogue again as the performance of junky stocks trumps quality.
The global economy reminds me of a marathon runner who runs too hard and hurts himself. But now he has another race to run. So he's injected with some serious, industrial-quality steroids, and away he goes.
As the steroids kick in, his pace accelerates, as if the injury never happened. He's up and running, so he must be okay -- at least this is the impression we get, judging from his speed and his progress.
What we don't see is what's behind this athlete's terrific performance -- the steroids.
Of course, we can keep our fingers crossed and hope that the runner has recovered from his injury and what we see is what we get -- the athlete is at the top of his game -- but there are problems with this thinking.
Serious steroid intake comes at a cost: It exaggerates true performance. Steroids can be addictive; once we get used to their effects it's hard to give them up. The longer we take them the less effective they are. Finally, there's a good reason why steroids are banned in sports: They damage the athlete's body.
Our economy suffered severe injuries last year, and to keep it going massive amounts of steroids were and are being injected -- they're what economists call stimulus (or government intervention).
Let's take a closer look at the extent of the steroidization (to coin a new word) of our economy, and its side effects.
I'll focus on the US economy, but similar arguments to varying degrees are true for many countries around the world. In the US, things appear to be stabilizing and improving on the surface, but beware, there's a giant IV hooked up to the veins of the economy, through which billions of dollars are constantly being pumped in. The stimulus is everywhere:
- To help the auto industry, taxpayers were subsidizing the price of autos through the Cash for Clunkers program and thus were creating artificial demand.
- The housing market, the epicenter of this crisis, is propped up from different directions. On one side there's a buyer tax credit (it used to be just the first-time buyer, now it's any buyer).
From a different direction, interest rates are kept low by the Fed's quantitative easing, fancy econ-speak for the Federal Reserve buying long-term bonds and thus keeping long-term rates artificially low.
Finally we have the (now) defunct government-controlled Fannie Mae (FNM) and Freddie Mac (FRE), which are the mortgage market of our economy because they account for the bulk of mortgages originated today.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter