New optimism of the rich may be leading indicator

By Rob Cox
May 19, 2010

The rich may be different. But they could also be a leading economic indicator. The corridors of wealth and finance are alive with new optimism. The Federal Reserve, though, doesn’t seem to share it. The U.S. central bank seems to have no intention of raising interest rates any time soon. The trouble is, if the Fed is behind the game there’s a good chance the rich will not be the only ones to suffer.

All seems very well indeed at the top of the food chain. Whole Foods Market, the purveyor of richly priced organic onions, last week raised its best estimate for same-store sales growth this year to as much as 7 percent from as little as half that much. Its stock has gained 45 percent this year while that of price-conscious Wal-Mart is down a bit.

Other anecdotes tell a similar story. The chief executive of one of America’s biggest banks reckons the strength of the U.S. economy will surprise everyone. Another senior banker thinks the Fed should hike rates right away. And billionaire hedge fund manager John Paulson has been busy telling investors he is seeing the upward side of a V-shaped recovery, and his investments in banks and other economy-driven stocks — now even including financially strapped casino outfit MGM Mirage — back that view up.

These could be the observations of a cloistered few inhabiting the asset-based, rather than the real economy. And it’s true that a big bank executive’s views are cushioned by the relatively rude health of customers like Paulson and multinational corporations that are reporting improved earnings and have balance sheets bulging with cash.

Then again, Paulson’s arguments, echoed in big company boardrooms, have evidence behind them. Indicators from Californian housing prices and U.S. household net worth to bank lending practices and the Institute for Supply Management’s manufacturing index back up the idea of a sharp recovery.

Of course, a chart in the deck yet to turn convincingly positive — job growth — is the one that matters most in Washington and on Main Street. That’s still a key factor behind the politics and, it would seem, the Fed’s desire to keep interest rates near zero.

The Fed’s caution may prove well-founded. Maybe the rich do live in a bubble. But the risk is that they are simply seeing the recovery first. If robust growth is just below the surface, a failure to bring interest rates into line early enough could bring about an inflationary cycle. That wouldn’t just hurt the rich, but everyone else as well.


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uhm, the FED is trying desperately to CREATE inflation, and yet with all the trillions of USD they’ve created inflation is barely above flatline.
Paulson is an idiot that got lucky – he wasn’t the only guy negative on housing, but his timing was lucky. And given that he bet billions of other people’s $$ on a timing bet shows he is reckless and an idiot (as per above). You can’t time recoveries any more than you can time crashes… and making quantum leaps of faith and getting lucky doesn’t make you an expert. So if some loose figures about spending on organic foods vs made in China crap is the only other evidence of a strong recovery or a gauge of how rich Americans feel… I mean that’s just laughable.
Who’s the editor there?

Posted by CDNrebel | Report as abusive

What a load of pontification!

This is exactly the sort of speculation and fear that is the bane of capitalist states. If we didn’t have greedy investors continually thinking “those guys placing the big chips ON the table/ taking the big chips OFF the table… They MIGHT just know something I don’t…” If we didn’t have the newsmen drumming up unjustified fear one minute and encouraging irrational hope the next – provoking a kind of economic schizophrenic, depressive bipolar disorder; just to get people to read more news and consume more advertisements… If only we didn’t have these things, our liberal Western economic models would be irresistable to the Chinese, the North Koreans, the African dictatorships.

But no. Instead of being the shining, irresistable example of stability that we ought to be, we have to send soldiers out instead on international adventures, as armed “ambassadors” and as forceful defenders of our system of values.
It’s not the same. It’s time to stop all this pontification. I’ve decided to read less news.

Posted by compsci | Report as abusive

The problem is – there are a lot fewer rich!

Posted by minipaws | Report as abusive

The rich should be the least optimistic, they are the ones holding the soon to be valueless dollar. Debtors win again!

Posted by minipaws | Report as abusive

I did not realize that organic onions and casinos were leading market indicators.

Posted by cranston | Report as abusive

The idea presented in this article is absurd, since the “Rich” feed of the new bubble created by the Fed.

Posted by yr2009 | Report as abusive

So we are going to use the wealthy as a barometer to measure if the economy is back on track or not??????!!!!!????? You cannot be serious?

Posted by Dahc | Report as abusive

MAYBE the rich live in a bubble? lol

Posted by Poalima | Report as abusive

Perhaps if Mr. Paulson’s companies started hiring workers rather than handing out pink slips and sitting on piles of cash, this alleged recovery he’s talking about might already be in train. This morning’s jobless claims number indicates corporate America hasn’t stopped firing just yet. Should weekly claims get north of 500K then it will be game over, for Mr. Paulson and everybody else.

Posted by Gotthardbahn | Report as abusive

It should also be pointed out that weaslthy individuals like recessions for a number of reasons, chiefly that everything gets a lot cheaper and that the pesky middle class, behaving like a bunch of arrivistes, gets put in its place.

Posted by Gotthardbahn | Report as abusive

What a namby-pamby perspective! The rich may or may not be correct that the economy is recovering. If the economy is truly recovering and the Fed doesn’t act accordingly the rich – and others – may suffer. So what’s the news here?

Posted by scoran | Report as abusive

Before 2008 I would have agreed that the “smart money” rich were leading economic indicators. But that year the rich lost a lot of money. It seems even investors like the respected Warren Buffet and George Soros were as blindsided as the rest of us. V-shaped recovery now? Not sure, maybe that’s wishful thinking. Since about 70% of our real economy is consumer spending and income comes from jobs, employment growth will do it all. Are firms starting to hire people in great numbers?

Posted by lith717 | Report as abusive

Before 2008 I would’ve agreed that rich investors are so-called “smart money” and may be a leading economic indicator. But in ’08 weren’t the rich, like the respected Warren Buffet, just as blindsided by the crisis as the rest of us? They lost a lot of money then. Are they any better at forecasting now? I’m not sure. A V-shaped recovery? Isn’t that wishful thinking by the “cloistered few” who have only rich clients? Fact is, about 70% of our real economy is comprised of consumer spending. Consumers, mostly middle class, spend money if they have jobs. If to this point we’ve had a “jobless recovery,” I wouldn’t be too optimistic about a V-shaped recovery. Probably U-shaped.

Posted by lith717 | Report as abusive

If the Goldman “Abacus” deal has taught us anything, this guy Paulson is probably on the other side of every trade he is promoting, selling furiously while suckers buy.

Posted by netdawg | Report as abusive

This is worrisome.

The only way Wall Street and the super wealthy have profited over the last decade is on bubbles and on shorting America. When they start licking their chops you better prepare yourself, because you’re about to be served for dinner.

Posted by garrisongold | Report as abusive