07.30.10

Last week, I wrote a column in Time about the unfortunate tendency of investors, pundits, economists et al to view stock markets as barometers for the economy and economic data as indicators of the markets. This tendency is pronounced in the media in general and the financial media above all, which looks daily for a story about why markets move up or down.

Almost everyday, some sort of economic statistic is released by government, ours or some government somewhere. Whether that is GDP data (which was released today and showed a not-too-impressive 2.4% growth for the second quarter) or inflation or durable goods or consumer confidence (not a government statistics but one that gets a lot of attention), each day brings some economic news. That permits a daily narrative that links the release of the statistic to the movement of the markets.

As if to prove that point, an article appeared in the New York Times on July 28, with the following headline” “Shares Fall as Data Says The Economy is Weakening.” The piece actually came from Bloomberg news, but no matter. It was yet another example of the false correlation between markets and economies.

Stocks represent ownership stakes - tiny ones - of companies, and companies increasingly exist in a universe only marginally related to any one national economy. They can, in fact, avoid many of the things that drag down national economies - labor, health care, taxes, old people, young people. And they can take advantage of things like cheap and plentiful global capital, easy mobility of goods, and increasingly helpful information technology systems that allow them to increase efficiency and productivity. They exist in their own transnational economic system, and the value of their stocks has little to do with whether the U.S. economy or any economy is ailing.

Of course, investors still believe in that correlation, and so trade the economic news, which in the short term means that stocks can track the economic data for that reason. But that doesn’t mean that a company such as Microsoft or Caterpillar is nearly as tethered to or dependent on the health of the economy in order to make colossal profits. And the sooner we collectively recognize the degree to which corporate land has broken free of national economies, the more we will be able to have the right discussion about national economic policy and about how and where to invest.

03.12.10

Last week, I published an essay in Time http://www.time.com/time/magazine/article/0,9171,1969745,00.html magazine about debt, arguing that our current preoccupation with the federal deficit and with debt in general is a dangerous distraction from the real issues: namely our inability to invest and spend wisely to create the economy of the future. The problem isn’t debt per se - after all, the U.S. government took on much more debt during and after World War II, and few would argue that was bad policy or led to disaster. The problem is that we aren’t spending our debt productively and are instead frittering it away on consumption, tax rebates, military budgets to pay for Cold War-era weapons systems, pork projects, or other forms of spending that will not yield returns in the future. Read more…

01.23.10

This week, the Chinese government announced that China’s economy had expanded by a stronger-than-anticipated 10.7 percent in the last quarter of 2009 and that it had grown 8.7 percent for the entire year. This news, however, was not greeted with relief but with the skepticism that has typically met such news emanating from China in recent years. The Wall Street Journal ran a story on its front page with the headline “China Seeks to Tame Boom, Stirs Growth Fears.” Because the news was accompanied by higher inflation, primarily the result of higher food prices, global markets reacted negatively, under the assumption that the government would soon begin to curtail credit extended by banks and would look to cool off the economy before it “overheats.” Beijing will almost surely try to curtail promiscuous credit, but only when domestic demand is strong enough to supplant it. And as for food prices, they remain a backdoor way for the government to transfer wealth from the cities (where most of the food is consumed) to the poor rural areas (where most of it is produced).There is no dearth of China skeptics, some of whom are actually in the Chinese government. But those have reason to worry–they are charged with maintaining the path that China is on and they need to be attuned to the slightest breeze that could develop into a fatal storm. Many who sell China short–some literally like hedge fund manager Jim Chanos–have less to stand on. The fact that China’s growth continues to be driven by state spending is seen as a critical flaw, and the ratio of consumer spending to trade and state-spending is seen as imbalanced and untenable, especially by long-time China watchers like Morgan Stanley’s Stephen Roach or the perma-pessimist Gordon Chang. Read more…

08.13.09

With Wall Street - and the Federal Reserve - in a headlong rush to declare the recession over, the economic data has indicated that the simple binary recession-no recession framework obscures more than it reveals. Yes, defined purely in terms of Gross Domestic Product (GDP), the recession looks to be winding down, with strong indications that GDP is about to turn positive after a long and painful swoon. Read more…

07.16.09

With a slew of major companies reporting earnings so far, it’s clear that expectations were severely skewed to the negative. Once again, Wall Street analysts overshot - this time to the downside. The substantial margin expansion reported by Intel; the higher-than-anticipated profitability of IBM; and the blow-out quarters of Goldman Sachs and JP Morgan all stand in contrast to sentiment just a few weeks ago, which was grim and getting grimmer. So what happened? Read more…

05.19.09