Handwringing Distracting Investors from Good Economic News

I am always intrigued by the words of optimism and the steadfast bullish arguments in the midst of market sell-offs. I am not talking about technical assessments calling for a short-term bounce. I am talking about the “everything is just fine” variety. Monday’s Nightly Business Report provided a picture-perfect example of such talk from Bernarnd Bauhmol, Chief Global Economist of The Economic Outlook Group. Bauhmol provided his rebuttal to what he considers the main fallacies that are “…distracting investors from recognizing how much the U.S. economy has improved over the past year, and the momentum that is still carrying it forward” (all quotes are paraphrased):

1. The economic rebound is fueled largely by government spending: Wrong – the private economy contributed 90% of growth since last summer.
2. It will be years before output returns to peak levels: Surprise – the economy is just a quarter or two away from making up all the production lost in the recession
3. The financial crisis in Europe will further damage US banks – not likely: the top 10 U.S. banks have $60B exposed to Europe’s top 5 troubled “sovereign debters.” That amounts to less than 10% of primary capital. This is ample cushion to absorb such losses.
4. The Chinese housing bubble will produce a property crash that will send global economic shockwaves – doubtful: Chinese homebuyers must put 20-50% down and do not have an elaborate derivatives market tied to real estate. In the U.S. homes could be had for nothing down.

These points are consistent with The Economic Outlook Group’s economic forecast for 2010 from January 4, 2010. While I have reasons to doubt each rosy scenario, I can appreciate one part of the group’s forecast: “We expect to see [gold] climb to $1,500 an ounce in the second half of the year.” Unfortunately, this expectation was built on a weaker dollar, not a weaker (and money-printing) Europe; the forecast for the dollar is to slip to 1.58 euro and 88 yen – seems very unlikely at this point.

It is always easy to pick on economic forecasts because anyone can make them, and no one can really predict the future on a consistent basis. However, I wanted to offer up this commentary as a potential alternative for those predisposed to look for the rosy side of things. I know the news is full of bleak headlines consistent with the mood of the stock market. (for example: “‘Alarmingly Bleak’ and ‘Littered with Huge and Half-Empty Glasses’“.)

Be careful out there!

Full disclosure: no positions