Wall Street is again irrationally exuberant.
That’s the phrase, of course, Federal Reserve Chairman Alan Greenspan used in 1996 to describe the stock market, which was rising for no reason other than the fact that the Fed was printing money like crazy.
Greenspan knew the problem he was causing but didn’t want to do the thing necessary to stop it — raise interest rates. He was afraid to get the Bill Clinton White House mad at him.
Well, history is repeating itself. And if you are an investor in the stock market, take heed: You better watch out. Take your mom’s advice on this one, it really is better to be safe than sorry.
Stock prices usually rise when the economy is doing well. That’s basic stuff but something you should be reminded of. A good economy equals strong corporate profits. And that combination leads to stocks becoming more valuable.
That’s not happening today.
In fact, the market is defying economic logic as it hasn’t done since the recent financial crisis.
Yesterday morning, Wall Street woke up to shocking news when the Commerce Department announced the nation’s gross domestic product declined 0.1 percent in the fourth quarter.
Experts had been expecting growth of 1.3 percent, a paltry rate, far below the 3.1 percent reported during the third quarter, which included the pivotal months right before the election.
And considering how much money the Fed is providing the economy through its quantitative easing experiment, even 3.1 percent growth is nothing to get excited about.
As expected, though, The Street shrugged off the abysmal GDP figure because it knows from experience the Fed will be there to bail out the stock markets, also known as the only thing going right for the economy over the past five years.
The Dow Jones industrial average, in fact, is 254 points away from its 2007 all-time high.
But here’s the problem.
Despite what financial media talking heads are saying (in hopes of keeping stock prices — and their incomes — up) that 0.1 percent drop in GDP could actually be the start of another recession.
Look, I’m not rooting for this to happen. But there’s a big difference between hoping the economy is doing better and it actually improving. And right now all Wall Street and politicians have is hope.
What’s more, that number would have been considerably worse if Commerce hadn’t pushed its inflation adjustment down to an unreasonably low level. The decline could have been a full 1 percent or more without that adjustment.
Wall Street also dismissed the GDP drop because it rationalized that:
* Hurricane Sandy hurt the East Coast economy
* The fiscal-cliff fiasco caused companies to pull back, and
* Government spending declined.
All of that is true.
The federal government also overspent in the third quarter because it was a good thing to do before the election. It then pulled back on spending during the last quarter.
And Sandy did slow growth, followed almost immediately by the positive impact of reconstruction.
There are always extraordinary events that affect the economy. And the first quarter is already filled with unusual occurrences — like the fact that all Americans saw their take-home pay decline because the Social Security tax rose.
And the automatic government spending cuts that’ll occur March 1 will certainly slow the economy even more. (Get ready for the calls for those cuts to be delayed.)
Washington can only delay the cuts and the upcoming discussions on raising the debt ceiling for so long. Eventually those issues will come back into the headlines and — rightfully — scare the hell out of businesses and consumers alike.
The one thing The Street has going for it is that the Fed definitely doesn’t want financial market turmoil at a time this. So Fed chief Ben Bernanke will do all he can to keep stock prices rising, even though that is not his job.
But what can he do?
The Fed has been practicing the voodoo economics of money-printing for years. And despite Bernanke’s blessed quantitative easing, we are still having this discussion about poor economic growth and recessions.
The Fed’s policy-making Open Market Committee concluded its two days of meetings yesterday. And guess what? The Fed didn’t have a magic solution because there isn’t one.
The Fed said it will keep stimulating the economy. So what!
Unless you believe the Fed will suddenly find its mojo, employ the same philosophy investing with Wall Street that you’d use at a casino.
Don’t invest more than you can afford to lose.
***
Prepare yourself. Tomorrow’s employment report could be one of the most confusing, misleading and ridiculous of them all.
How do I know?
Because the job figures for January that are put out on the first Friday of February are always tough to understand due to the curious outlier that I’ve pointed out in this space: seasonal adjusted numbers. Last year, when you looked at the raw data, there was an actual, unadjusted loss of 2.86 million jobs.
Don’t expect a pretty picture this year, either.