Economist Dave Rosenberg has published another missive, patiently explaining to anyone who will listen how the Powers That Be are Creating The Illusion of Prosperity (zerohedge). Among mainstream economists, Rosenberg stands out. Most of would call him a pessimist, but there are no Bears or Bulls where Reality is concerned. Why is he so forthright? Honestly, I think it's because he's Canadian. He is not burdened with the strenuous effort required to maintain the myth of American exceptionalism.
Nobody should be reading this and jumping to the conclusion that my fundamental views have changed over the contours of this post-bubble-bust economic recovery. The economy remains on government-assisted life support, and the government has been very successful in creating the illusion of economic prosperity. It is doing this to buy time and help preserve social stability as the adjustment towards housing deflation, consumer deleveraging, and chronic unemployment takes its toll on the growth rate in organic final demand.
The question really is still one of sustainability. If the Fed and our public officials were as comforted as the financial markets now seem to be over the sustainability of the recovery, then after a full year into it the central bank would not have embarked on another monetary experiment and the government would not have dipped into Social Security as a means to put more change in people’s pockets for spending purposes. Money, as an aside, that isn’t really ours.
Rosenberg lists all the reasons why the sustainability of the best "recovery" money can buy is in doubt, including the usual suspects—declining house prices, the need for "draconian" spending cuts in state and local governments, a global food crisis, rising energy costs, and the mess in the Eurozone. You may not have noticed that global food crisis because it's rarely reported on in the United States. I'll be posting on that soon.
Rosenberg is most incisive talking about our Central Bank, which has manufactured so much of our current prosperity—
Back to Bernanke. In a speech he just gave to the Federal Deposit Insurance Corporation forum on small business:
“Our policies have contributed to a stronger stock market just as they did in March 2009 when we did the first iteration of this program … a stronger economy helps small businesses more than larger businesses. Interest rates are higher but that’s mostly because the news is better. It has responded to a stronger economy and better expectations.”
So the Fed Chairman seems non-plussed that Treasury yields have shot up and that the mortgage rates and car loan rates have done likewise, even though he said this back in early November in his op-ed piece in the Washington Post, regarding the need for lower long-term yields:
“For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment.”
But the Fed Chairman is at least getting what he wants in the equity market. Recall what he said back then — “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”
Our fearless leader—the Bernank—has succeeded in boosting stock prices, thus making us all wealthier But haven't we been down this road before? Another phony Bear market rally? Rosenberg again—
So back to the markets. We are in a very powerful bear market rally. In fact, in less than two years the S&P 500 has managed to accomplish what it did over a five-year span from 2002 to the 2007 peak. That was a bear market rally too.
You see, a primary or secular bull market requires a positive exogenous shock to the economy. One that is self-sustaining. One that adds to the productive capital stock. Not only did we have the baby boom stimulating demand growth in that 1949-66 secular bull run, but we also had Eisenhower roll out the nation’s highway network, which exerted a powerful multi-year impact on transportation costs and productivity...
There has been no positive exogenous shock boosting productive capital stock. But who cares? A New Era of Prosperity has just begun!
Having seen this kind of thing before, Rosenberg has decided to make it official—the Federal Reserve now has three mandates, not two.
So now the Fed has added a third mandate to its charter:
1. Full employment
2. Low and stable inflation
3. Higher equity valuation
The real question we should be asking is why Ben didn’t add this third policy objective back in 2007 and save us from a whole lot of pain over the next 18 months?
And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.
Regarding prosperity, if you can't achieve the real thing, you might as well fake it. Appearances count for everything in a declining Empire. Rising equity values make those manning the trading desks on Wall Street very happy. The wealthy vested in the stock market are also very happy. The lucky few inhabiting the Money World are very pleased with this bubbly rally in the S&P 500.
Unfortunately for the unlucky many living on Main Street, those Mom & Pop retail investors who have only their retirement money to gamble with, the Bernank's "virtuous circle" includes only those who can afford to ante up, and the real price—the risk premium associated with catching the wave in a phony stock market rally—is very high. Perhaps we should call it a virtuous circle jerk instead.