Steve Pearlstein Says He Is a Fool
Steve Pearlstein says he is a fool: a bearish fool:
With Rosy Predictions, Pundits Missing 2006's Warning Signs : The columnist who tries to predict the future of the economy or the financial markets is a fool.... The consensus view... is that everything is going to be peachy-keen in 2006. Economic growth will slow only modestly... inflation will remain in check; the air will be let out gradually from the real-estate bubble; energy prices won't get any higher... the transition at the Fed will be seamless; the trade and budget deficits will shrink; the dollar may drift down, but only a bit; and stocks will post respectable gains.... [T]he story of 2005 was that oil producers proved just as willing to lend us the money to buy oil that we otherwise could not afford as the Japanese and Chinese have been to lend us the money to buy cars, jeans and flat-screen TVs. The arrival of this newest credit card from the Middle East may have allowed us to live above our means for yet another year.
But let's not fall into the trap of confusing that with long-term economic health. While the signals coming from the economic pundocracy may be solid green, the ones coming recently from the marketplace are flashing yellow. A middling Christmas season for retailers. A bicoastal housing boom that has already begun to abate.... A bond-market yield curve that makes it no more expensive to borrow money at a fixed rate for 30 years as for one year.... Hedge funds so flush with cash that they are lending money into a commercial real estate bubble, bidding up the price of gold and financing hostile takeovers. Pay packages for corporate executives and investment bankers up 30 percent in a year in which investors were lucky to eke out a 3 percent gain.
This is not to argue the economy is hurtling toward a crackup. The strength of the economy over the past year -- indeed, over the past 23 years, during which there have been but two relatively shallow recessions -- speaks eloquently of the resilience that comes with the globalization of trade and capital flows. At the same time, I have a hard time squaring so many disquieting realities with a consensus forecast that has the economy gliding into some magical macroeconomic equilibrium.A more likely scenario, it seems to me, is a 2006 in which the economic chickens finally come home to roost. Annual growth rates will fall from their current 3.7 percent to somewhere below 2 percent before the final quarter as government deficits are trimmed and households stop spending down their home equity. Inflation will reach 3.5 percent as key workers finally demand their fair share of productivity gains, health care and commodity prices continue to rise, higher energy costs work their way into the economy, and import prices spike in response to another steep drop in the value of the dollar.
As economic growth slows, stocks will continue to drift sideways, snuffing out a nascent boom in corporate capital expenditures. Meanwhile, the long bull market in bonds will finally end as interest rates rise -- the result of heightened inflation expectations, continued monetary tightening by the Fed and a newfound reluctance of foreigners to invest their trade surpluses in dollar-denominated Treasury bonds. The one likely bright spot in this scenario is the export sector, both manufacturing and service, which will benefit from a weaker dollar, continued robust growth in China, India, Eastern Europe and Latin America, and a revived Japanese economy.