Economic Recovery Already Underway

Just a month ago yesterday, markets opened to the news that the firm Bear Stearns (BSC) had been vaporized — and for no better reason than that investors had arbitrarily lost confidence in the venerable brokerage firm and all withdrawn their money from it at the same time. It was only the Federal Reserve stepping in with $30 billion in risk capital that prevented the Bear collapse from taking down world capital markets.

Everyone was already saying that the U.S. economy had fallen into recession. The Bear catastrophe could only make matters far worse.

And yet now, a month later, the economy has not gotten worse. Compared to the bleak expectations then, even just hanging in there would have been an upside surprise. But it's more than that. Things actually are getting better.

Consider the key earnings reports coming out this earnings season. General Electric's (GE) miss was a shocker. But should it have been? Everyone knows its results are dominated by its capital markets subsidiary, so why the surprise when it — like every other bank and broker — took a big hit? The only true surprise was that GE's management let it be a surprise — they should have warned.

Other than that, the news has been terrific. Look at what's come out of the technology sector the last couple days. Intel (INTC), IBM (IBM) and Google (GOOG) all surprised big time on the upside. No falloff in world-wide technology demand at Intel and IBM. And no falloff in the consumer sector for Google.

How about this week's macroeconomic statistics? The Philadelphia Fed's survey of regional manufacturing activity reported lower yesterday. But the day before, the New York Fed's comparable survey defied bearish expectations and came in with a neutral reading.

Industrial production was reported as rising 0.3% last month, when it was expected to have declined. That's a key recession indicator — and it's just not indicating. The high-tech component of industrial production has been especially strong, currently at all-time highs.

And then there are the markets themselves. Since the panic bottom a month ago yesterday, the S&P 500 has returned 7.1%. The best-performing sectors have been financials, energy and materials, indicating that the credit crisis is mending and that fundamental forces of growth are strong.

The credit crisis is indeed mending. If you invested in safety-first Treasury bonds a month ago, you've lost 2.9%. But if you bought risky high-yield corporate bonds — also known disparagingly as "junk bonds" — you'd be up 3.8%. If you were really daring, and bought the supposedly toxic waste that's been at the heart of the credit crisis — collateralized debt obligations (CDOs) based on subprime mortgages — you'd have done even better, making 6.7%.

The bears hang onto every little scrap of evidence coming out of the financial and housing sectors to bolster their case that we're already in a recession and headed for a depression. Doesn't any of this good news count for anything?

The worst is over. It's more than over. Consider what's happened in the banking sector. With Merrill Lynch's big write-off yesterday, and Citigroup's (C) this morning, cumulative bank and broker losses from subprime lending and related credit craziness has come to something like $250 billion. That's quite a trick. According to data reported by the New York Fed, the value of all the subprime and Alt-A mortgages currently in default is only $116 billion. What's likely happened here is that the banks have taken mark-to-market losses on securities that anticipate much higher foreclosure rates which haven't happened yet, and may in fact never happen.

And don't tell me it's all because the markets expect the Federal Reserve to lower interest rates to zero and keep them there forever, propping up the economy. That's what markets were expecting a month ago, but not now.