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It would appear that the recent strength in the stock market has reinforced the opinion of those in the bullish camp that the worst has been seen for the economy.
The thinking goes this way: The stock market cratered in January on the panic over French bank Société Générale (FR:GLE, news, msgs). That bottom was successfully tested during the Bear Stearns (BSC, news, msgs) debacle, which was handled thanks to the "skills" of the Federal Reserve.
The subsequent rally (since markets look to the future) is prima facie evidence to bulls that the U.S. economy is on the mend. Thus negative economic news is ignored, as it's now been fully discounted -- or so the story goes.
Apparently, not much thought has been given to the idea that perhaps the stock market and the bullish contingent are reading the facts incorrectly, just as they did when they interpreted the first payment defaults on 2007-vintage subprime-mortgage paper as likely to lead to nothing more than merely a speed bump in economic growth, or a "pause that refreshes."
It would seem that folks of this mind-set have taken a page from the shoddy appraisal tactics of the real-estate bubble and have concluded that all the economy will experience is something on the order of a drive-by recession.
Taking the measure of a bubble's aftermath
But does that really make sense? What's occurring is a debate about the future, and we cannot be certain of how it will look until we get there.However, I believe we have a framework with which to try to handicap the upcoming economic period: comparing the potential damage inflicted by the bursting of the real-estate bubble to the bursting of the prior stock-market bubble. Obviously, both periods were fueled by intense speculation, albeit in two different asset classes.
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But there's an immense distinction between the periods. In the case of the most recent bubble, massive debt was applied to that asset class as folks borrowed against homes to make ends meet. (That's now created an economic problem for both borrower and lender.)
That's something we didn't see in the stock bubble. Nonetheless, the undertow from the stock bubble was so potent that it took 13 interest-rate cuts and three tax cuts to finally ignite a real-estate bubble to bail us out of the stock bubble.
The Fed began cutting rates in January 2001. Although the official recession data show the downturn was quite short, it was not until spring 2003, after the U.S. had invaded Iraq, that the stock market and the economy really started to recover.
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Feverish impersonation of a recovery
But it wasn't much of a recovery if you strip out mortgage-equity extraction -- otherwise known as the housing ATM -- and gauge it by historical standards.In addition, the "recovery" was rather lopsided, as up to 40% of all jobs created were real-estate related, i.e., construction workers, real-estate agents, appraisers, mortgage processors, etc. For all intents and purposes, the last recovery was essentially nothing more than a wild real-estate bubble. Yes, the economy functioned, but not as it did in past recoveries.
Continued: Forced to deal with the fallout
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