The Stock Market, or The Real Economy?

This quote appeared in yesterday's New York Times:

"We are coming out of this {recession}, I am virtually certain, " Mr. Buffett said. "I see figures on 70-some companies daily. I have a lot of information coming in and basically everything to with home construction is as bad as it has ever been, and everything else is getting better."

http://dealbook.nytimes.com/2011/10/02/others-go-but-buffett-stays-on-side-of-president/?pagemode=print

The papers are full of talk of the next recession. Economists and analysts are tripping over each other in cutting forecasts. Yet companies involved in business - including Warren Buffett's Berkshire Hathaway - are saying that commerce is actually not all that bad.

Buffett, by the way, was one of the first to say that we were heading for recession in 2008, so his track record on this stuff is pretty good.

Then there's this quote in this morning's Financial Times from Tim Solso, chief executive of US-based Cummins, which is the world's largest independent maker of diesel engines:

"I believe governments and the press have been too pessimist about what's happening in the economy. While I recognize the concerns about excessive public debt in Europe and the US, we {at Cummins} are probably experiencing greater opportunities for expansion than ever before."

Mr. Solso went on to say that Cummins will be hiring 4,000 more employees next year, mostly engineers, or a 10% expansion of their workforce.

It seems to me that the real risk to the global economy is political, not fundamental.

Bank stocks are falling because investors correctly perceive that making profits when yields curves are flat and loan growth anemic will be difficult indeed. Moreover, the growing populist movement against bankers (coming to a town near year you!) makes it unlikely that policymakers will ride to the rescue of banks and brokers as they did in 2008.

Yet if you move away from the financial sector you find that conditions are far from dire. And while the stock markets continue to fall - adding to the gloom on Wall Street - the rest of the world is seeing reasonable growth.

Yesterday the Economist's blog has a good piece about all of this. The article notes that most recent pieces of economic data show an economy that continues to grow. Manufacturing, construction, even auto sales, are all surprising on the upside, defying the doomsayers.

And yet the risk remains that politicians will do their best to snatch defeat out of the jaws of victory:

A global economy with decent cyclical fuel and no obvious imbalances is being betrayed by politics. Policy has pushed us over the brink in the past when it was for our own good (ie, inflation was threatening). If it happens now, it will be the first recorded instance of it happening by obduracy instead of by choice.

http://www.economist.com/blogs/freeexchange/2011/10/economics-v-politics

Thus the challenge for investors: the stock market, or the real economy?