Bears, Bulls, Chickens and Pigs: wOw’s Wall Street Weekly with Liz Peek (Week of 7/6) 

Editor’s Note: Liz Peek is a financial columnist and the author of wOw’s SHEconomics.

Holy smoke! Now even the Pope is weighing in on financial regulation. In a rare encyclical, the Pontiff added his voice this week to those clamoring for economic overhaul. Come to think of it, maybe we could use some divine guidance.

The Big Debate underway is whether the United States needs a new stimulus program. This is idiotic. Whether you are a fan or foe of the monstrous $787 billion package pushed through Congress earlier this year, it is preposterous to assume that such an ungainly mishmash of programs could be implemented to any real effect in just a few months. Some $100 to $150 billion of the total has been committed to various projects, but only a portion of that has found its way into bank accounts. Moreover, if the stimulus spending isn’t working – does it make sense to make it bigger? No!

Anxiety about the stimulus package, and about the course of the economy, stems mainly from rising unemployment. The administration’s rosy outlook for stemming job losses proved unrealistic. (This should give some pause to those who buy into Obama’s projected "cost savings" from health-care reform or "green job creation" from cap-and-trade. These numbers, truly, are complete fiction. There is nothing I have found in either bill that would support such projections.)

While the labor situation does look gruesome, there are some encouraging signs. The four-week moving average of unemployment claims dropped in May by 53,000; normally a decline of 40,000 would signal the end of a recession. Continuing claims, though still high, appear to be peaking. The truth is that the numbers are so messed up by the auto industry bankruptcies that they are inconclusive. Data from the next two or three months will be much more telling.

While the signals are still mixed, there continue to be more positive than negative readings on the economy. Business confidence is improving, earnings estimates are moving slightly higher, the drop in consumer credit has slowed, house prices are stabilizing and manufacturing inventories are dropping. Moreover, two serious developing headwinds – rising oil prices and higher interest rates – have slumped from their recent highs.

The latter is good news and bad news, and points to just how delicate the current outlook remains. Oil prices and interest rates have backed down because growth prospects suddenly dimmed – dimmed precisely because oil prices and interest rates had increased. Investors, and policymakers, are in effect chasing their own tails. As oil prices zoomed higher in recent months, and as investors become concerned about projected budget deficits from our free-spending administration, consumers were hit with higher fuel costs and a drop in the opportunity to refinance their mortgages. This latter activity, as I’ve written before, has been far more stimulative than any program out of the Beltway.

The respite on interest rates may prove short-lived. The Federal Reserve has signaled that it is becoming less aggressive in its purchases of certain assets, including Treasuries, as it begins to unwind the buildup of its balance sheet. Some fear the Fed may be moving too quickly to rein in its largesse, but others correctly point out that moves to stimulate or restrict the economy almost always are overdone.

The Fed has to get this sort of push-pull just right, or it is possible that we could indeed fall back into recession. Joe Biden was blasted recently for admitting that the administration had "misread" the economy. Newsflash: this is tricky business, which is why many people, including myself, are aghast at the Obama team’s growing incursions into all sectors of commerce.