The global economy is a complicated entity that relies on accurate information about financial trends, something that was missing at strategic times during last week's market meltdown.
Indeed, the trigger for the domino effect that plunged stock markets from Asia to Wall Street began in China where the sell-off resulted from rumors the government was going to impose stringent measures to slow down its overheated economy. But those rumors appeared to be unfounded in a supersecret authoritarian bureaucracy where transparency is nonexistent.
China has been attempting to slow its economy for years, something, ironically, we've been pushing them to do. But as Bear Stearns economist David Malpass noted last week, the China sell-off was "valuation related" and resulted, understandably, in cooling down its overvalued stocks.
A memo by Bear Stearns' Hong Kong-based strategist Michael Kurtz on Jan. 16 warned "China (Underweight): Valuations now excessive, stocks are over-owned, and liquidity support may be moderate."
Back in the United States, the markets were spooked by the spreading global sell-off but also by a variety of less-than-accurate reports -- the most egregious being the story that Alan Greenspan was predicting a recession later this year.
Dow Jones Newswires ran a headline, saying "Greenspan: Recession in U.S. 'Possible.'" Bloomberg News Service said, "Greenspan says U.S. may slip into recession."
In fact, he predicted nothing of the sort, and even a cursory reading of what the former Federal Reserve chairman said in remarks via satellite at a global business conference in Hong Kong shows that quite clearly.
Story after story, even after the markets' steep decline Tuesday, flatly reported that he saw a possible recession in the near future, without all of the caveats and modifiers for which Greenspan is famous when he talks about hypotheticals.
Here's what he said: "While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting (growth) forward into 2008 ... with some slow down."
He went on to describe conditions in the global economy as "benign and stable," a view that is consistent with economic forecasters here and abroad. And he said both the United States and global economies were far more resilient now than ever before, partly as a result of increasing global liquidity.
In short, Greenspan's "widely reported comments weren't nearly as negative as the headlines portrayed," Malpass told his clients. But the r-word he uttered dominated the headlines and, in the 24/7 news world we live in, that message contributed to Wall Street's jitters and helped to push it into the tailspin we saw last week.
To be sure, other factors contributed to Wall Street's fallback, including a 7.8 percent plunge in manufacturing orders, January's steep decline in new housing sales and the terrorist attack on a U.S. base in Afghanistan from newly resurgent Taliban forces.
But Fed Chairman Ben Bernanke has been telling Congress for the past two weeks that the global economy remains strong and he expects continued growth in the U.S. economy this year and next.
"We are looking for moderate growth in the economy going forward," he told a House committee Wednesday.
The economy was clearly slowing in the last three months of 2006 to a 2.2 percent revised Commerce Department estimate, down from its earlier 3.5 percent preliminary figure. But that was due in large part to the cyclical declines in the housing markets and in manufacturing. I think both of these sectors will pick up in the last half of this year.
The housing sector has been the boogeyman of the U.S. economy. But its negative fallout has been exaggerated. Predictions of a housing bubble bursting, bringing down the U.S. economy, have not borne out.
"We are now well into the contraction period, and so far we have not had any major, significant spillover effects on the American economy from the contraction in housing," Greenspan also said last week.
Yes, new home sales were down sharply, in many cases priced out of the market's lower selling range, but Americans were still buying homes. Existing home sales rose 3 percent in January, as declining real-estate prices have begun to bring new buyers back into the market.
Meantime, the economy was still growing within the 3 percent range for the past year and Bernanke sees growth picking up, especially in the last half of the year.
Consumer spending is decent, wages have been rising, U.S. exports are stronger than ever and for the past eight months we have been in a global bull market that shows no inherent signs of slowing down over the longer term.
Markets are self-correcting, pausing to catch their breath before climbing higher. All that profit-taking last week steered a lot of money to the sidelines, but it will be returning to the equities markets to pick up cheaper stocks that still have much room to grow. |