Saturday, September 19, 2009

The Dead Cat Case for Optimism

James Grant, thought by most to be a perma-bear, has turned bullish. In a WSJ Op-Ed, he announces his bullish stance and quotes Michael Darda, who seems to hold the core facts that cause Grant to turn bullish:
Knocked for a loop, we forget a truism. With regard to the recession that precedes the recovery, worse is subsequently better. The deeper the slump, the zippier the recovery. To quote a dissenter from the forecasting consensus,Michael T. Darda, chief economist of MKM Partners, Greenwich, Conn.: "[T]he most important determinant of the strength of an economy recovery is the depth of the downturn that preceded it. There are no exceptions to this rule, including the 1929-1939 period."
Grant has a bit of a point here, what long-time stock market observers call a "dead cat bounce", also can occur in the economy.

Essentially this is a reversal from an extreme panic desire to hold cash. As panic subsides, sideline cash finds its way back into the markets and economy. But unless there was a previous cleansing of malinvestments during the downturn (and government bailout activity prevented this from occurring this time around) things can continue to unwind if the Fed isn't trying to prop things up with new money printing. As of Thursday, there appears to be no attempt, since February, to pump money into the economy to prop up the old manipulated structure. Thus, while there does appear to be movement in the economy, it does not have the Fed's muscle to make it last.

In other words, the perma-bear has transformed himself into a bull, because he has been fooled by a dead cat. This cat may bounce, but it certainly isn't going to have any kittens.

1 comment:

  1. Wenzel,

    This is shocking coming from government-skeptic Jim Grant. Even more shocking is his timing. Why did he wait until now to turn bullish?