Eric Angeli: Most economists ignoring cracks in the system

The National Association of Business Economics recently polled 72 economists for their views on the economy. Not one expected anything but positive growth in the year ahead1. The mainstream is more convinced than ever that danger in the economy has subsided. We are in the clear, is seems – at least to them.

Eric Angeli, of Sprott Global Resource Investments Ltd., takes issue with this broad optimism.

“What is really happening is that the confidence among money managers is very high,” he says. “The apparent recovery of the last few years has not been confirmed by the data available — in fact it has been just the opposite. We have seen poor job creation numbers, stagnant household income, declining manufacturing indexes – nothing that would suggest there has been a real recovery. Yet somehow, the stock market’s daily march higher has convinced investors that we are, in fact, exiting the crisis. Admittedly, this stock market rally has created additional wealth in most 401k plans but it would be naïve to think that it is based on any fundamentals.”

All the while, mainstream economists reinforce the mainstream point of view with predictions that the economy will continue to improve.
Eric warns that risks are most acute today, when the general public believes that the financial system and the stock market are safe. Another financial disaster could be close, as the recovery is much more fragile than most people believe.

Eric points to a recent interview with former Chief Economist at Morgan Stanley, Stephen Roach. Mr. Roach tells Simon Black of Sovereign Man that it isn’t clear the Fed’s policies are helping2. Says Mr. Roach:

We can’t keep running our economy on the back of easy money with zero interest rates and liquidity injections through Quantitative Easing. I fully subscribe to the Fed tapering; I wish that they would taper everything immediately and get away from asset purchases as a primary tool and an instrument of monetary policy.

He continues:

Central Banks have done the heavy lifting [to stimulate the economy] and what have they gotten for it? We have the weakest recovery that the world has ever seen. It’s not clear to me that the monetary easing that was necessary to deal with the crisis has been the least bit capable of spurring an economic recovery.

Take the U.S. – since the onset of Quantitative Easing, the Fed has injected about 3.2 trillion dollars into the economy through asset purchases. Yet national GDP growth has been only 2 trillion dollars over that period. What’s the Fed gotten for it? Very little, in my opinion.

In fact, Mr. Roach suggests that the Fed’s policies just helps the ‘rich,’ because they own stocks:

The Fed’s strategy [has been] to get the share markets up, get risky assets up, [and] stimulate the economy through ‘wealth effects.’ One problem: ‘wealth effects’ are for wealthy people. What about the real problem in America which is middle-class, structurally unemployed, workers and their families? Are they benefitting from the wealth effect?

“This exacerbates an already serious uneven income distribution in America,” he concludes.

Economists like Mr. Roach realize that the Fed is fuelling a stock market rally as a tool to boost confidence. While confidence is high for the dollar and U.S. stocks for now, Eric advises that investors should be wary of the ‘groupthink’ predictions concerning this Fed-driven rally.

Eric Angeli has been with Sprott Global Resource Investments Ltd. since 2006, when he moved from major Wall Street firms Morgan Stanley and Bear Stearns to work under the tutelage of Rick Rule in the natural resource space. Eric takes a concerted interest in the education of his clients and is an avid proponent of the value-based investing strategies of Benjamin Graham.

Eric holds a double major in finance and international business from New York University’s Stern School of Business. To contact Eric, e-mail him [email protected] or call 1.800.477.7853.


Creative Commons image from The Library of Congress