April 22, 2010
Newsweek’s Daniel Gross is back at it again. His cover story for Newsweek’s April 9 issue is another attempt to make a preemptive strike at writing history. You may remember his cover story for the magazine’s July 25 issue, entitled: “The Recession Is Over”. During the eight months since the publication of that article, the sober-minded National Bureau of Economic Research, or NBER — which is charged with making the determination that a recession has ended – has yet to make such a proclamation.
The most recent cover story by Daniel Gross, “The Comeback Country” has drawn plenty of criticism. (The magazine cover used the headline “America’s Back” to introduce the piece.) At The Huffington Post, Dan Dorfman discussed the article with Olivier Garret, the CEO of Casey Research, an economic and investment consulting firm. Garret described the Newsweek cover story as “fantasy journalism” and he shared a number of observations with Dan Dorfman:
“You know when a magazine like Newsweek touts a bullish economic recovery on its cover, just the opposite is likely to be the case,” he says. “It sees superficial signs of improvement, but it’s ignoring the big picture.”
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Meanwhile, Garret sees additional signs of economic anguish. Among them: More foreclosures and delinquencies of real estate properties will plague construction spending; banks haven’t yet cleaned up their balance sheets; private debt is no longer going down as it did in 2009; both short and long term rates should be headed higher, and many companies, he says, tell him they’re reluctant to invest and hire.
He also sees some major corporate bankruptcies, worries about the country’s ability to repay its debt, looks for rising cost of capital, which should further slow the economy, and expects a spreading sovereign debt crisis.
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Many economists are projecting GDP growth in the range of 3% to 4% in the first quarter and similar growth for the entire year. Much too optimistic, Garret tells me. His outlook (which would clobber the stock market if he’s right): up 0.4%-0.5% in the first quarter after revisions and between 0% and 1% for all of 2010.
“Fantasy economies only work in the mind, not in real life,” he says.
Given his bleak economic outlook, Garret expects a major market adjustment, say about a 10% to 20% decline in stock prices over the next six months. He figures it could be triggered by one event, such as as an extension of the sovereign debt crisis.
David Cottle of The Wall Street Journal had this reaction to the Newsweek article:
Therefore, when you see a cover such as Newsweek’s recent effort, yelling “America’s Back” in no uncertain terms, it’s quite tempting to stock up on bonds, cash, tinned goods and ammunition.
Now, in fairness to the author, Daniel Goss, he makes the good point that the U.S. economy is growing at a clip that has consistently surprised gloomy forecasters. It is. The turnaround we’ve seen since Lehman Brothers imploded has been remarkable, if not entirely satisfying, he says, and he is quite right. At the very least, U.S. growth is all-too-predictably leaving the European version in the dust. Goss is also pretty upfront about the corners of the U.S. economy that have so far failed to keep up: job creation and the housing market being the most obvious.
However, the problem with all these ‘back to normal’ pieces, and Goss’s is only one of many creeping out as the sky resolutely fails to fall in, is that the ‘normal’ they want to go back to was, in reality, anything but.
The financial sector remains unreformed, the global economy remains dangerously unbalanced. The perilous highways that brought us to 2007 have not been sealed off in favor of straighter, if slower, roads. Of course it would be great for us all if America were ‘back’ and so we must hope Newsweek’s cover doesn’t join the ranks of those which cruel history renders unintentionally hilarious .
But back where? That’s the real question.
Meanwhile, the Pew Research Center has turned to Americans themselves to find out just how “back” America really is. This report from April 20 didn’t seem to resonate so well with the rosy picture painted by Daniel Gross:
Americans are united in the belief that the economy is in bad shape (92% give it a negative rating), and for many the repercussions are hitting close to home. Fully 70% of Americans say they have faced one or more job or financial-related problems in the past year, up from 59% in February 2009. Jobs have become difficult to find in local communities for 85% of Americans. A majority now says that someone in their household has been without a job or looking for work (54%); just 39% said this in February 2009. Only a quarter reports receiving a pay raise or a better job in the past year (24%), while almost an equal number say they have been laid off or lost a job (21%).
As economic conditions continue to deteriorate for middle-class Americans, the first few months of 2009 are already looking like “the good old days”. The “comeback” isn’t looking too good.
Grasping Reality With The Opinions Of Others
In the course of attempting to explain or criticize complex economic and financial issues, it usually becomes necessary to quote from the experts – often at length – to provide an understandable commentary. Nevertheless, it was with great pleasure that I read about a dust-up involving Megan McArdle’s use of a published interview conducted by Bruce Bigelow of Xconomy, without attribution. The incident was recently discussed by Brad DeLong. (If you are a regular reader of Professor DeLong’s blog, you might recognize the title of this posting as a variant on the name of his website.) Before I move on, it will be necessary to expand this moment of schadenfreude, due to the ironic timing of the controversy. On March 7, Time published a list of “The 25 Best Financial Blogs”, with McArdle’s blog as number 15. Aside from the fact that many worthy bloggers were overlooked by Time (including Mish and Simon Johnson) the list drew plenty of criticism for its inclusion of McArdle’s blog. Here are just some of the comments to that effect, which appeared on the Naked Capitalism website:
For my part, in order to discuss the proposed settlement resulting from the investigation of the five largest banks and mortgage servicers conducted by state attorneys general and federal officials (including the Justice Department, the Treasury and the newly-formed Consumer Financial Protection Bureau) I will rely on the commentary from some of my favorite financial bloggers. The investigating officials submitted this 27-page proposal as the starting point for what is expected to be a weeks-long negotiation process, possibly resulting in some loan modifications as well as remedies for those who faced foreclosures expedited by the use of “robo-signers” and other questionable practices.
Yves Smith of Naked Capitalism criticized the settlement proposal as “Bailout as Reward for Institutionalized Fraud”:
The perspective taken by Edward Harrison of Credit Writedowns focused on the extent to which we can find the fingerprints of Treasury Secretary Tim Geithner on the settlement proposal. Ed Harrison emphasized the significance of Geithner’s final remarks from an interview conducted last year by Daniel Gross for Slate:
From there, Ed Harrison illustrated how Geithner’s roadmap has been based on the willingness to follow that logic:
Will those of us who refuse to believe in Tinkerbelle face the blame for the next financial crisis?