he recession is here.
That is bad news for the many workers who have lost or will lose their jobs. It's bad news for companies, which certainly will see their profits diminish and may see their existence threatened.
It is a dismal development for the admininstration and its supply-side and monetarist missionaries, who have discovered that their theories so far are as unsuccessful in promoting both economic growth and declining inflation as the ones they replaced.
But to the often-contrary investment world, down is up. Bad news is good news. Now that Wall Street has realized the recession is here, bond prices have surged, stock prices seem ready to recover and interest rates have fallen steeply.
Wall Street's recent rallies must seem like a perverse development to the administration as well. For the bond and stock markets are beginning to rally just as President Reagan has been forced to admit that there are "hard times" ahead for the economy. Last summer, when the president looked to his Wall Street supporters for a vote of confidence, stock prices seemed to sag every time he scored a legislative victory.
When investors voted with bucks rather than ballots, they turned thumbs down on Reaganomics.
There may be gloom in the Oval Office as the president pleads with the nation to tighten its belt and give his policies more time to work. But there is something approaching mild glee in the investment community.
In a report released today, Merrill Lynch, Pierce, Fenner & Smith, the nation's biggest brokerage firm, recounts that the economic outlook has deteriorated, and it urges investors to get in on the bond market rally.
As things are looking down for the nation, they are looking up for Wall Street. But that should come as no surprise either to the nation or to the administration, whose chief economic spokesman, Treasury Secretary Donald Regan, is the former chairman of Merrill Lynch.
For when a recession hits, jobs and profits decline, and so does the demand for credit. Companies that were borrowing to build up inventories find they can't sell the goods they have warehoused. So they lay off workers and buy fewer raw materials. Gradually they need to borrow less money to finance their declining stocks.
When demand for credit goes down, so do interest rates. When interest rates fall, bond prices rise and stocks become better investments.
Bond prices have risen more than 10 percent in the last two weeks alone. A decline in interest rates is music to the bond investor's ears, music that is loud enough to drown out the wails of unemployed neighbors.
Stock investors are a little more circumspect. For at the same time that interest rate declines make stocks more attractive, worsening corporate profits make stocks a riskier investment.
When the president sounded a pessimistic note at his Tuesday press conference, the stock market rally faltered. But analysts say that once stock investors figure out how deep and long the recession will be, stock prices will "discount" that information and begin to rise long before the economy shakes off the recession. Stock prices already are above their early-October levels.
There is, however, one danger that several Wall Street analysts fear, although not on the record. They worry about a "surprise bankruptcy" of a major company.
"If Chrysler goes down, there will be little impact on investor confidence," said the chief of research at a major Wall Street firm. "The whole world knows Chrysler is in trouble. The same holds for savings and loan associations. But if a big company not widely known to be in trouble goes bankrupt, there could be a crisis in confidence."
Interest rates have been so high for so long that many companies shunned the long-term bond markets and financed their needs in the short-term credit markets. Heavy short-term borrowing either from banks or in the commercial-paper market makes those companies vulnerable to declines in sales. They may not have to pay back principal on a bond borrowing for years, but short-term borrowings come due in a matter of weeks or months.
As bond rates come down, more and more companies will seek to sell long-term debt securities and use the proceeds to repay their short-term loans.
But therein could lie the final perversion in Wall Street. If too many companies try to sell too many bonds too soon, long-term interest rates could rise sharply again.