Hooray for “less bad!” Hooray for more risk! Hooray for quasi-legal governmental manipulation of the financial markets! Hooray for all three at once!...especially when share prices are soaring.
Yesterday morning we learned that America's industrial production was “less bad” than expected. Specifically, output at the nation's factories, mines and utilities fell “only” 0.4% in June - the smallest monthly drop in eight months. This terrific economic news, coupled with a cosmetically pleasing earnings report from Intel, powered the Dow Jones Industrial Average to a gain of 256 points.
Curiously, investors did not seem troubled that the very same report showing a modest – albeit seventh straight - drop in industrial production also showed a drop in capacity utilization to 68% - the lowest such reading in more than 40 years. Nor did investors seemed terribly troubled that the consumer price index (CPI) for June jumped a hefty 0.7%.
Nope, they didn’t seem troubled one bit. Instead, investors read the headlines, waited for CNBC to tell them the headlines were good, then rushed to buy stocks. By the time the dust had settled, several high-profile stocks like Intel (INTC), Microsoft (MSFT) and Goldman Sachs (GS) had reached fresh highs for the year. The stock market darlings never looked so adorable!
We’re happy to see points on the board, but distrustful of their durability. As we (almost) never tire of pointing out, “less bad” is not good, even though it might feel like it for a little while. Furthermore, no matter how many billions of dollars Goldman Sachs might make for itself (after the elimination of Lehman by former Treasury Sec. Hank Paulson) by playing games on computer screens, the overall economy will never regain its vigor until industrial production actually INCREASES, and until capacity utilization moves meaningfully higher than it was during the Johnson Administration.
The U.S. economy is still struggling. And the credit markets are still failing to function – mostly because the roots of the American financial system remain diseased. Thanks to the crisis-deferral tactics of former Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke, the American banking system is now grafted onto the diseased roots of dishonest asset pricing, deceptive accounting, capricious government intervention and malign regulatory overhauls.
We had the chance to implement constructive changes and we blew it. When we finally had the chance to purge of the rot from the financial system, we chose the exact opposite path: we bailed out the rot, and forced the healthy to subsidize the process. A handful of privileged folks are benefiting. The rest of us are paying with our taxes (Rude Awakening's Eric Fry).