Gauging the mood of the market over recent weeks, the dominant sentiments seem to be uncertainty and angst. Certainly there are a number of possible explanations: a weak economy, the ugly employment picture and deflation worries, to name a few.
But it was the lead editorial in the Aug. 12 New York Times, headlined, "When the Fed speaks," that I think most aptly put its finger on the recent bout of fear and unease.
"So why are the markets unnerved? Simply put, it is increasingly plain to see that the Fed has all but played its hand, and the economy is still in deep trouble. The economy's central problem is not lack of money to hire workers or make loans or rates that are too high. It is lack of hiring and lack of lending. . . . "
The Times is correct when it says the economy is in trouble. We have now experienced the one-year-plus rebound that was a function of the huge fiscal and monetary injection on the part of Congress and the Federal Reserve. This followed the liquidation of inventories and slashing of production rates in 2009 that were themselves a consequence of the near vaporization of our financial system. Now we in America are stuck dealing with the fallout from the epic real-estate/credit bubble.
Nothing 'new' under the sun
This is not to say that the economy is going to come to a halt. Such is not the case. Much of the world is doing fine and will continue to as countries pursue extremely easy monetary policies.The U.S. will benefit to some degree from growth in those parts of the world that didn't ruin their financial infrastructure, and there will be organic economic activity here as well. But we are not going to enjoy the growth that most people expect to occur after a brutal economic decline.
What we are experiencing is a post-bubble bust, similar to what Japan has spent two decades suffering through in the wake of its own real-estate bubble. As I pointed out many, many times as ours took shape, there is a big difference in terms of consequences between a bubble that is focused on equity, like stock market/dot-com mania, and one that uses massive amounts of debt, as our real estate bubble did.
So while there is a great deal of focus on whether we are about to have a double-dip recession, I would say that there is nothing to double dip from. The economy overshot to the downside in 2009 and has snapped back. (While many debated whether our recovery would be V-, W-, L-, or U-shaped, I maintained that something like a square root sign was more likely.)
Continued: 'Next time down' leading to a long time sideways