Two weeks ago I posted an entry titled Wall Street’s Bullish Bias. Take another look at that blog to get an appreciation for how Wall Street characterizes government and central bank rescue attempts. We’ll evaluate the effectiveness of those efforts in a future blog post.

Since writing that piece, I came across some additional Wall Street research from a reputable source that demonstrates how far the Street is willing to twist news to provide it with a bullish conclusion. The earlier article listed 14 “Positives” that the research contended were starting to dominate. Prominent among the “Positives” were government stimulus efforts. Now comes news that federal outlays have declined by almost 3% year-over-year–obviously a decrease in direct stimulus. If stimulus is good, this would seem to be a negative. Not so according to the recent research piece. The decrease is characterized as positive because it is good for the deficit.

In a similar vein, the same research piece reported that total government spending (state, local and federal) declined year-over-year in the fourth quarter. Since a decrease in government outlays diminishes GDP, one would expect this to be viewed as a negative. Again, not so. This reduction in government spending was spun positively as “making room” for private GDP to increase.

On a role, this same study took on unemployment. Along with housing, unemployment has been the most vexing problem facing our economy. In the worst unemployment crisis since the Great Depression of the 1930s, every job is precious, and government goes out of its way to trumpet any new jobs it has “created.” This research piece reported that since early 2010, total government employment has declined by 500,000. That is truly unfortunate for those who lost the jobs, but even that dire statistic was cast in a positive light as “making room for private employment to increase.” One might logically make that argument if government employment were depriving private employers of needed candidates. With almost four job seekers for every private job opening, however, such an interpretation is ludicrous.

While it’s clear that intelligent, informed people can disagree on interpretations of data, Wall Street is remarkably consistent. When reading any piece of Street research, never lose sight of Wall Street’s primary job – to sell product.

Since the greater than 20% stock market decline in last year’s third quarter, the excellent research staff at ISI has chronicled almost 100 stimulative policy initiatives by governments and central banks around the world. That coordinated effort to reverse the worldwide economic slowdown has succeeded in halting the stock market’s decline and in boosting prices back to the levels prior to last year’s market collapse.

Earlier this week ISI reported that for the first time ever the world’s five largest central banks were simultaneously conducting aggressive easing operations. In addition to our own Fed’s zero interest rate policy and willingness to buy bonds with no liquid market, the European Central Bank has launched its Longer-Term Refinancing Operations and has made virtually unlimited amounts of money available to European banks for three years at a mere 1%. The People’s Bank of China has just pledged ongoing Eurozone support and is expected to continue domestic stimulus. Although not directly involved in Eurozone operations, the Bank of England and Bank of Japan have both committed to additional aggressive quantitative easing.

Such widespread coordinated rescue efforts were unknown during 2008’s near collapse of the global financial system. Recent central bank actions appear to support legendary hedge fund guru George Soros’ contention that the current financial crisis is even more dangerous than that of 2008. According to Bloomberg, Soros characterizes this as the most difficult situation he’s seen in his career. Soros says that it’s more important to survive this crisis than to get rich.

It appears that the world’s central banks are in agreement that the global debt crisis is so severe that they will do what they must to ward off the normal corrective forces of recession. Recent actions are analogous to betting the ranch. All other resources have been spent. They have been forced into the ironic attempt to solve a problem of excessive debt by issuing far more debt.

So far the willingness of central banks to pump massive streams of new money into the system has elicited good feelings and rising stock prices. And there is no way to know how long such positive feelings will remain. However, unless the central banks are able to prevent recessions indefinitely (an unrealistic proposition), eventual economic slowdowns will spotlight the folly of would-be central planners who will be held responsible for the even more intractable levels of debt that we or our children and grandchildren will face in the years ahead. The mature economies of Europe, the United States and Japan have no realistic prospect of growing their way out this debt morass. The critical questions facing investors are how long central banks can defer the pain, how much they will inflate the debt bubble and on whom the inevitable defaults will fall.

In 2011, most of the world’s equity investors suffered. Although business conditions have continued to slow on most continents, the majority of world equity markets have turned the tide and started 2012 on a strong note. As typically happens, perception of the news brightens after markets rise. Earlier this week the excellent researchers at ISI offered a litany of “Positives Starting to Dominate.” Notwithstanding the quality of their research, these points typify the bullish bias of the Wall Street establishment rather than portray an accurate rendering of underlying business fundamentals.

After each of ISI’s “positives,” I’ll offer what I consider to be a more relevant counter-balance from the perspective of investors rather than short-term traders.

• Housing starting to recover. While some measures of decline are improving, prices continue to fall and huge numbers of foreclosures remain a fact of life. It will take years for the housing market to return to conditions that existed before the bubble.
• Labor market improving. This is a celebration of direction over level. At 8.3% unemployed, the labor market is only slightly better than its worst status since the Great Depression of the 1930s. The government’s U6 measure, combining both unemployment and unintended underemployment is above 15%. Additionally, a large number outside those measures have given up hope of finding a job and have left the labor force entirely.
• Credit expansion unfolding. This is due more to the unprecedented creation of money from world central banks than from any greater willingness to lend by bankers, who are still licking their wounds from their mindless expansion of credit over the prior decade. Applause for credit expansion must also be questioned while we are still trying to recover from an unprecedented debt crisis.
• Low dollar. While a cheap dollar does improve profit potential for exporters, no country today wants too strong a currency, and currency wars with unpredictable negative consequences are a very real possibility. It’s also hard to believe that the U.S. will long maintain its historic economic supremacy with a weak currency.
• Low rates. While low rates clearly benefit the housing market and businesses financing operations or expansion, low rates penalize savers and pension plans. Furthermore, with central bankers artificially lowering rates and keeping them down for years, unintended negative consequences could be numerous and severe.
• Pent-up demand. We hope there’s pent-up demand, because consumers have bought far less in recent years than had become customary before the bubble burst. It is certainly possible that personal deleveraging is continuing, however, as people realize that they had run up unsustainable debt levels before economic conditions deteriorated. With unemployment still extremely high and the fear of unemployment a real concern for many, the willingness to spend may be markedly diminished in the years ahead.
• U.S. manufacturing renaissance. It has been encouraging to see manufacturing statistics and manufacturing employment improving over the past several months. After years of ceding our manufacturing dominance to the rest of the world, however, we need far more evidence to call this improvement a sustainable trend.
• U.S. energy sector booming. As with manufacturing, it’s certainly welcome to see this industry improving. The durability of that improvement, however, will undoubtedly be determined by the success or failure of efforts to reignite world economic growth.
• Double-dip fears minimal so far this year. How strong a positive is it when we’re celebrating the reduced potential for a serious negative? It’s damning with faint praise at best. And with Europe falling into recession, this potential must refer only to the U.S.
• Inflation receding around the world. Receding inflation is testimony to weakening worldwide business conditions despite the huge monetary expansion being conducted by most major central banks. Ironically, our Federal Reserve is afraid of inflation receding too much, possibly leaving us with deflation, a condition Fed Chairman Bernanke has vowed to combat.
• Europe financial strains have eased. Really? Why are heads of state and central bankers meeting daily for weeks on end to ward off the dangers of sovereign default? The pledge of unlimited supplies of new money to endangered banks for almost any quality collateral has eased the liquidity crisis, certainly not the solvency crisis.
• Liquidity is building in the world economy. No question liquidity has improved. That’s what happens when central banks hand out newly created money. And many corporations have improved their liquidity by lengthening the average maturity of their debt. It is perhaps instructive to remember that when you or I borrow from a bank, we may have more cash in our pocket, but we still have to pay it back, and we have to pay interest while the loan is outstanding. Improved liquidity may only buy time for entities with intractable solvency problems.
• There have been 83 stimulative policy initiatives announced around the world over the past 5 months. Why have governments and central banks done that? Because business conditions are so bad.
• The Fed has rates on hold at zero and is doing Operation Twist. See the prior comment.
• ECB is scheduled to further expand its balance sheet on February 29 by as much as 1 trillion euros. Ditto again. Moreover, do you suppose that bond buyers might start to worry about the value of the currency in which they are supposed to be repaid? Perhaps that concern helps to explain why the price of gold has exploded upward, a situation that central bankers and other proponents of fiat money hate to see.
• There are no particular problems at the moment such as Japan disasters, Thailand floods, supply-chain disruptions, gasoline price spikes, and debt ceiling crises. Thankfully, although seasonally adjusted gasoline prices are up by almost 30 cents over the past two months, and we know we will soon again be wrestling with our own need to reduce deficit spending. Unfortunately, natural disasters happen all the time, and when any nation, company or individual is excessively leveraged, risks of bad outcomes are far more likely. The world and its institutions have never before been so dangerously overleveraged.

Is the glass half full or half empty? It largely depends upon what one chooses to look at. Do the listed “positives” foretell steadily improving world economic business conditions? Can governments and central banks print their way to wealth and prosperity? If so, why not do it all the time? Notwithstanding the possibility of central bank largesse creating periodic bursts of enthusiasm, current economic and monetary dangers are severe and the future very uncertain.

No time to write, so I’ll post again next week.

By interesting coincidence, the S&P 500 began 2011 at 1257, exactly where it began 2012.  Last year stock prices rose strongly into February on positive investor sentiment, exactly as prices have this year.  Prices reached the peak of that rally last February at about 1345.  They spent the rest of the year working their way back to 1257.  Today the S&P 500 closed at 1345.  All analogs eventually break down.  It will be interesting to see how long this one tracks last year.

Enjoy the Super Bowl.