Pessimistically Optimistic

“‘Remember this central paradox of financial crisis,’ Lawrence H. Summers, Mr. Obama’s top economic adviser in the White House, said in mid-March, when every arrow was pointing down, ‘that while the problem was caused by excessive complacency and excessive optimism, what we need today is more optimism and more confidence.’” May 9^th NY Times. Simply put, if everyone would spend and react as if there were no managed depression, we wouldn’t be in one.

Since 70% of American business is driven at the consumer level, this pretty obviously means that consumers need to start acting like… well… consumers again. Try doing that when your house is worth 30-50% (or worse) than it was a year and a half ago, you have lost your job or seen your pay drop and you are still worried about losing your job, your retirement investments vaporized (despite the occasional bear rally that few believe will last) and you really cannot borrow money even for normal business activities or to make purchases beyond the daily minimums. Going on a consumer spending spree under these conditions could possibly result in a sustainable medical diagnosis of some advanced form of psychosis.

Inventories are down! Great news, huh? Except companies are dumping merchandise at bargain rates in a desperate attempt to generate enough working capital to stay alive – they certainly cannot borrow that capital anymore, and they’re not exactly going on a hiring splurge to make more stuff they will have to dump at below cost. They can’t even order new stuff from their suppliers if they could sell it at real prices, since the credit markets are frozen, and suppliers are demanding cash in advance.

The big banks passed the stress test… except that a dozen of them need $75 billion more capital on their books, and after that stress test (and public cash infusion), they’re still not likely to be lending again. The other, healthier banks, aren’t exactly lining up to lend money either. When these lenders do begin releasing loans, you can pretty much bet it will be to the biggest of the big corporate players who are, more likely than not, going to get and use that money to pay off more expensive debt and buy attractive “distressed” companies at bargain rates. I doubt that this will create any new jobs and may in fact result in that layoff euphemism – job consolidation. If you really believe that these banks passed the test, I suspect the best overall grade you can give to this banking system is a “D.” Don’t expect a credit “thaw” for the little guy any time soon.

So if the Obama administration tries to be optimistic and be the cheerleader we all know it needs to be, that optimism flies in the face of the daily existence of most Americans. It just doesn’t ring true as more and more jobs are lost, even if we are losing them at a lower rate. As Fed Chairman Ben Bernanke and President Obama moved from “glimmers of hope” to “the gears of our economic engine do appear to be slowly turning once again,” we also hear the recent statements from Treasury Secretary Tim Geithner telling us not to mistake the slower pace of bad economic numbers for a recovery.

If the government cheers too loudly, their credibility plummets. If they don’t cheer enough or at the right time, consumer and business confidence sinks even more. But what is real? We’re just a few months from the beginning of recovery? From hitting bottom? If anybody gives you a clear answer, the only sane reaction is not to believe them. So much of the market is based on psychology, so if you predict clear events, effectively, you have to be a mind reader. Makes you wonder why they don’t interview Chriss Angel (“Mindfreak”) more often. The one consistency in the prognostication is inconsistency; the only agreement among economic experts is disagreement.

Even if the overall belief is that the cyclical nature of economies will, eventually, create a reversal of fortunes, there is absolute disagreement about when that will occur and what our future will look like – from we will be living in a smaller economic universe with lowered expectations and lifestyles to solid prosperity will return and we will live at the top again. The truth probably lies somewhere in the middle, but for most of us, “recovery” most certainly is not around the corner, and when we do find that elusive “bottom,” we are just as likely to move sideways for a pretty long time and then “enjoy” low end, single digit “growth” when recovery does start. Some companies, skilled workers and regions will begin the process well before others, a pretty normal expectation.

Even if the stock market begins to shudder realistically upwards (being the dutiful leading economic indicator it is), very few of us will see a manifest difference in our daily lives at that precise moment in time. It took years of lying to ourselves about growth and opportunity to create this maelstrom, it will take years to undo that reality and return to any “happy place” of genuine prosperity and well-being. Me? I’m just going to the local mega-mall for some quality alone time.

I’m Peter Dekom, and I wonder the same things that you do.