Friday :: Jul 23, 2004

Wall Street Begins To Question The Bush Recovery And Greenspan's Credibility


by Steve

Some of the market experts on Wall Street are already commenting about a stock market that is looking for excuses to go down. Sure, there was talk earlier this week about an “October Surprise” in the market, where some combination of events would spur a stock market uptick just before the election and magically lead our “investor class” nation to a resounding vote of confidence to elect Bush for another term.

Yup.

But today, there was talk that the market was softening on bad jobs, sales, and earnings reports, with some noticing that for the first time in a long time, some advisers were recommending reducing equity investments and replacing them with cash. That usually is a sign of bad things ahead, and since psychology drives a large part of the market, one must ask if things economically now are so well for Bush, yet Wall Street is recommending retreat, then what can possibly cause a swing back in his favor in the second half?

Standard & Poor's cut its asset allocation recommendation for US equities to 45 per cent from 50 per cent and boosted cash to a hefty 35 per cent. The last time S&P recommended such a big cushion was in 1988.

Sam Stovall, chief investment strategist at S&P, said the S&P investment policy committee did "not like the way the market is acting. Our feeling was the market would have been able to move higher or at least tread water after [Microsoft's announcement and Mr. Greenspan's testimony]. The market is taking whatever news it can and putting a negative spin on it."

Beyond that, even Alan Greenspan is being accused of being a Bush cheerleader touting overly optimistic forecasts, not by liberals, but by the same Wall Street economists.

"Chairman Greenspan donned his Goldilocks outfit," in presenting the report, Ethan Harris, chief U.S. economist for Lehman Brothers Global Economics wrote to clients yesterday. "We think he is being a bit overly optimistic."

The Fed's forecast matters because it reflects the expectations of most of the central bank's policymakers as they make decisions on interest rates in coming months, said Peter Morici, a professor at University of Maryland's business school.

The report's "forecast is really too optimistic," Morici said. "The real danger is that they overreact and raise interest rates too much and too fast, a mistake they have made in the past."

Greenspan's upbeat comments were followed by "a chorus of bullish comments" from other Fed officials through the week, Harris said. "There is some cheerleading going on here," he said.

Morici suggested another reason for the report's tone. "My concern is that they are putting out this very optimistic view because of the election," he said. "It's optimistic to the point of being suspect, making speculation about political motivation fair game."

So you now have observers from major Wall Street firms and academics openly questioning the assessments of the Fed and ascribing political motives to them, thereby undercutting Greenspan’s credibility.

Listening to our GOP friends, they tell us we already have healthy job growth. Yet even the market now concedes the Kerry point that the Bush job boom is more lower-wage in nature than in previous recoveries, and is leading to a gap between wages and prices while corporations hoard cash. If growth is cooling already (as you would expect it would) and yet the strong job gains haven’t occurred yet, then why would companies begin hiring permanent higher-paid workers this late in a recovery if they haven’t yet and their earnings are softening?

Sure, Bush could suddenly capture Osama and find bunkers of WMDs magically in Iraq, and that may lead to a spurt in the market this fall. But if energy prices keep rising or don’t fall significantly, food prices don’t moderate, and now the market plateaus and keeps coming down, even gradually, due to less-than-expected earnings and job reports, then what effect exactly will the Osama/WMD surprises have on the longer-term market psychology?

Steve :: 10:02 PM :: Comments (8) :: Digg It!