A Spectrum of Economic Doomsayers

The pages of the Wall Street Journal over the past few weeks have featured a number of editorials forecasting economic doom.

For example, Phil Gramm, former Senator and economics professor, wrote a piece comparing the current political and economic climate to those of the Depression. Using updated statistics and an approach echoing that of Amity Schlaes in her important recent book, The Forgotten Man, Gramm at least painted a brighter picture of today's faster-moving electoral changes as a response to federal economic missteps.

Donald Luskin focused on looming trade wars and a technical overlay of recent Dow index performances with those of the late 1930s. Luskin suggested that taking the wrong road now on trade and protectionism could well fulfill the technical pattern of a catastrophic market decline.

Mort Zuckerman, a noted successful entrepreneur and investor, wrote of the continuing damage that the housing sector inflicts on the US economy. In short, he criticized continued government manipulation, i.e., support, of prices, thus prolonging the bottoming and eventual recovery of this sector. Zuckerman noted that, with the recent cratering of housing due to oversupply and overly-generous financing terms, new would-be buyers don't see a home as the automatic, guaranteed, tax-advantaged savings opportunity that it historically has been. Thus, the depressed demand in the face of government-tainted, higher-than-market-clearing prices.

Finally, on Monday of this week, Carnegie Mellon economist Allan Meltzer wrote another version of the now-familiar tale of the Fed fixing a problem that doesn't exist. Specifically, stoking inflation with too-low rates, when what ails business is uncertainty regarding Washington's heavy, erratic regulatory hand and demonizing tone.

Providing evidence that prolonged deflation has rarely occurred, and the one time it indisputably did was during the Great Depression, when the gold standard caused the money supply to shrink due to hoarding in the wake of bank failures. Reading Meltzer's editorial, it's difficult to see how we are not sowing the seeds for both the next investment bubble and long-term inflation. And, as he suggests, eventually, "a flight from government bonds."

It's all scary, and, yet, equity markets have rebounded since late 2008 and early 2009. Unemployment remains high and sticky, but corporate profits have grown.

Still hanging out in the ether is Art Laffer's June WSJ editorial predicting wholesale economic disaster in 2011 if the planned tax hikes are allowed to take effect.

What to think?

It's really hard to simply write off all of these concerns and predictions of continuing economic dislocation, misallocation of resources and under-performance of the US economy in the face of attempts to micro- and macro-manage so many elements of this complex system. Short term equity market moves can reflect short term profits, sentiments, etc. The very existence of liquid equity markets allows for the belief by investors that, come the time it's necessary, they can sell quickly and even go short.

I do know this. Reviewing  equity portfolios and performances from earlier in the decade, and the mid-1990s, today's economy and equity markets just don't look healthy. The number of companies passing muster as investments is much fewer than in the past, while the pattern and strength of the S&P is much more erratic, and weaker.

This doesn't appear to be a truly healthy equity market, yet, and it's certainly far from a healthy US economy, too.