Larry Kudlow is downright delirious on CNBC. Byron Wien at Blackstone thinks the S&P 500 will hit 1,500 at some point this year. The CEO of temp-agency Manpower predicts we will see a huge hiring burst any month now. Normally cautious Bob Doll at Black Rock is upbeat about the economy and the financial markets for 2011. Austin Goolsbee at the White House is boasting that the 1.3 million private sector jobs created in 2010 is significantly greater than the U.S. economy experienced in the first year of the last two recoveries.
Sorry to be a Cassandra, but when everybody gets so bullish at once, I get scared. The environment clearly is improving, but all the evidence points to a rebound that's likely to remain choppy.
After the stock market returns to pre-Lehman levels, investors pour money into stock funds at a rate unprecedented in the last two years. Does anyone really believe that it would take a whole lot to spook these same retail investors to reverse course and head for the hills?
Consumer spending has recovered at the margin and Christmas sales were slightly stronger than expected until a blizzard paralyzed much of the East Coast during the last week of 2010. But that came at the expense of a lower savings rate in the second half of last year. Many large retailers still don't have the confidence to add personnel at any meaningful pace. And it's clear that Americans are still struggling to figure out what their optimal ratio of spending to saving should be.
All this is appropriate and in the long term we may land on a more solid foundation. But there are still so many problems out there that could slow a recovery down. Most states and municipalities are facing severe budget crises. Does anyone really believe the new Congress is going to come close to balancing the federal budget? The private sector is indeed creating new jobs, but hardly enough to make a dent in the 8 million jobs lost in the worst recession in 80 years.
Finally, there's Europe, where the problem isn't Greece, Ireland or Portugal. It's Spain, with 40 million people and a 15% unemployment rate. A Portugal bankruptcy would be like a Rhode Island financial failure; Spain would be more akin to California defaulting.
Rumors swirl that China will bail out the Club Med countries on Europe's periphery. What happens if China finds its own internal problems require the nation to spend its huge trade surplus at home?
The enthusiasts will argue that all this disconcerting information is priced into the financial markets. I hope they are right. But that still leaves what former Defense Secretary Donald Rumsfeld famously labeled the "unknown unknowns" lurking out there. Hopefully, after the last three years, those unknowns will pale in comparison to what we've just experienced.