It's the Weather, Stupid

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Byline: How else to explain the delirium of the Obama boosters? By Niall Ferguson

It must be the weather. For some reason, everyone thinks that the economy is recovering and so President Obama is going to be reelected. Just put a bit of blossom on the trees and people lose their minds.

Or maybe it's not the weather. Maybe we're all just fed up with the Republican Party's interminable process of nominating Mitt Romney as its presidential candidate. Who needs The Hunger Games when you've got the Pennsylvania primary?

So let's have a little reality check. First, according to Gallup, Obama's approval rating right now is 46 percent. That's better than the 40 percent he was scoring in the second half of 2010, but it's still too low. Since Eisenhower, all two-term presidents have been above the 50 percent line at this stage in their first terms.

Second, don't mistake that 22 percent stock market rally we've seen since November for a real economic recovery. Remember, this is the result of massive monetary stimulus, not only by the Federal Reserve but also by other central banks. Since fall 2008, the central banks of the E.U., the U.K., the U.S., and Japan have slashed interest rates to near zero and increased their balance sheets by a combined $8.76 trillion. The Fed believes that the recovery will eventually come through the "portfolio rebalancing channel" (PRC), whereby cheap money boosts asset prices, which boosts consumption via the so-called wealth effect, which boosts production, profits, capital spending, employment and--who knows, one day--maybe even home prices.

But there's another PRC at work here: the People's Republic of China. After all, the U.S. stock market index is now a barometer of the global economy, not the U.S. economy: foreign sales account for nearly half of all revenue for the companies in the S&P 500 index. Over the past five years of financial crisis, China has been the fastest-growing market for nearly all of America's biggest corporations.

So guess what happens if there's any decline in the stimulus provided by the two PRCs? We found out last week, when the Fed signaled that it might not turn on the monetary spigot known as QE ("quantitative easing") a third time. Coming on top of Wall Street worries about a slowdown in China, this--plus the latest lousy economic news from Europe--stopped the stock market rally in its tracks. …