Ecomomists Confusing Bull and the Bear Market

Although the Dow dropped below the 9,000 mark today amidst a round of profit-taking, last week's mini-rally still has economic experts optimistic about the new year. But is this a self-fulfilling prophesy perpetrated by Wall Street?

Optimism in the financial world is part-and-parcel to the whole idea of investing, isn't it? If the outlook were bleak, who would participate?

Last week's impressive rally, which lifted the Dow over 9,000 for the first time in two months, may have had the fortune of arriving in tandem with numerous articles on the 2009 outlook for the economy. Of course, most were bullish and those that were not, were eagerly anticipating good times near the middle of the year.

Though Jim Cramer writing at thestreet.com has a headline foreseeing a return to the Wall Street of old, he only predicts the Dow rising to near 10,000 – hardly something to celebrate. Cramer based his projections of the possibility of the housing market rebounding with new buyers and – like many other economists – wondering how high unemployment will rise.

A recent article in USA Today does a good job of laying out various scenarios occurring during the next year. Some optimistic, some pessimistic, and others ominously following the current downward trends.

In a nod to the suspicion that nobody knows where the economy is heading, the USA Today article contributes this:

A recent Citigroup survey of institutional investors reflects the wide disparity of potential performance outcomes for stocks next year. More than 20 percent expect the S&P 500 to rise 11 percent to 22 percent in 2009. But more extreme predictions — both pessimistic and optimistic — were also evident. About 15 percent think stocks could fall as little as 12 percent or as much as 39 percent. And about 15 percent said stocks could post gains ranging from 44 percent to 55 percent.

So, what does all this optimism portend for the economy?

Niall Ferguson at the Financial Times wrote a far more honest and hardly satisfactory outlook on the economy with a clever look back on 2009. In the article he refers to not the second-coming of the Great Depression but what he coins as the "Great Repression," where the entire economy is in denial about its current state.

So, while Ford's reported 32-percent drop in sales looks rosy next to Chrysler's announced 53-percent tumble, unemployment looks more and more grim and banks teeter near insolvency, many experts on the market still say don't worry. An unsympathetic observer might conclude that this sort of denial would make the former Iraqi Minister of Information Mohammed Saeed al-Sahaf – also known as the man who pleaded with reporters that American troops were not in Baghdad when they were – quite proud.

Using the Union to Break the Fall of Detroit

REPUBLICANS BLAME U.A.W. FOR NO BAILOUT DEAL

If the Chrysler bailout of 1979 is our guide for the tumultuous times in Detroit today, then Federal assistance for the Big Three is not much more than a short-term solution.

Popular culture fawned over Chrysler Chairman Lee Iacocca after "saving" the company. He had a best-selling book, graced magazine covers and hawked cars on television commercials. Iacocca was the man, except, in hindsight, he barely stopped the bleeding of the company and the slow slide of the American automobile industry.

A Hertitage Foundation essay from 1983 did well to take some of the shine off Chrysler's resurgence, calling the bailout "quasi-bankruptcy" in which the company failed to recapitalize or make significant changes to its leadership. The report points out that Chrysler missed out on becoming a leaner and more innovative company and its laggard ways also spread to General Motors and Ford.

Barry Ritholtz at The Big Picture blog details this point in a posting last month:

The Chrysler bailout of 1980 was not quite a pre-packaged bankruptcy reorganization. It left the company with the same management team, the same union contracts, the same pension obligations, and the same health-care coverage; all the bailout did was buy the company a few more years. Indeed, the pre-bailout industry looked almost identical to the post-bailout industry. None of the Detroit automakers, Chrysler included, received any long-term benefits from the bailout.

The major difference between 1979 and today is the hovering dark shadow of economic collapse, and many people believe that whether The Big Three fail is almost irrelevent just as long as it does not happen now, when just a smidge of panic on Wall Street will trigger further bloodletting.

What is interesting about our current financial atmosphere is a willingness by Republicans in Congress to stick to their ideological guns during this period by laying blame on the United Auto Workers. Embattled Louisiana Senator David Vitter simply says, “It sounds like the U.A.W. blew it up,”

Possibly the leading opponent to the bailout Sen. Richard Shelby of Alabama, who has four foreign automakers in his state, told the Wall Street Journal that he has always been against government assistance of private industry, noting that he voted against the 1979 Chrysler bailout and the recent $700 billion financial bailout. The story also describes the South's hospitality toward non-union workers and low wages.

Blaming the union for scuttling the proposed $15 billion bailout is not fair, according to The Nation's John Nichols, who notes that the UAW has already made huge concessions to The Big Three, while attempting to further weaken them will hamper the labor movement in the U.S.

Anyone who thinks that breaking the UAW will only weaken the circumstances of autoworkers is missing the point of the royalist enterprise, which is to weaken the ability of all American workers to demand fair pay and benefits.

Failure to aid Detroit could lead to unimaginable economic decline (just in time for Barack Obama's inauguration!). If politics is the ulterior motive of House Republicans – where one of labor's strongest unions is obliterated and the president-elect is saddled with an agenda solely of economic matters – then some people will wonder who's interests are being served.

Look for more thoughts on the auto bailout at The Commonwealth Club's Bank of America-Walter E. Hoadley Annual Economic Forecast, coming January 14. Former U.S. Labor Secretary Robert Reich will share his reactions.