Money Sage (archive)

"Life is a comedy to the man who thinks,
and a tragedy to the man who feels" -- Sir Horace Walpole

In the realm of intellectual endeavor in which we find ourselves immured, we frequently think of the brilliant insight of Sir Horace Walpole. The tragedy in investing is that most people miss the moves up but manage to catch the full moves down, selling instinctively at the bottom. The economic and lifestyle consequences for the generality of investors is negative, often sharply so.

Because the contemplation of tragedy is so painful, dear reader, we prefer to focus on the aspect of comedy.

For the student of the "investing world" -- if we may so term it -- there is an abundance of material from which to draw. Consider, for example, the rising Greek chorus of dire warnings about the recessionary tidal wave which is about to swamp us.

When the yield curve inverted, well over a year ago, giving us a highly reliable signal that substantial economic weakness was likely 12-18 months in the future, it was greeted by dead silence from the cognoscenti. (Or, to frame it another way, we may invoke the ancient Roman saying:
"the silence shouts.") As the curve remained inverted, sometimes flattening but then reverting recurrently to its inverted structure, it became impossible to ignore totally. Consequently, those who are paid to "assess" such things -- those steering the monetary ship of the United States, those overpaid economists and "consultants" who sell their expensive advice to a wide range of businesses and financial institutions, and those who pontificate for the amusement -- if not the edification -- of the Great Unwashed (i.e., the investing public and yes, let us be frank about it, the generality of the investment institutions as well)-- responded that the curve DID NOT SIGNIFY ANYTHING. The curve, you see, had lost its predictive power. And on what, pray tell, was this insistent assertion based? NOTHING. Unless one wishes to categorize the infinity of erroneous forecasts produced with such regularity by the economics and market seer confraternity as SOMETHING.

Numerous "reasons" were adduced to defend the unsupported (and indeed, INSUPPORTABLE) contention that the relationship of short rates to long rates now meant nothing, when the anomalous situation of short rates EXCEEDING long rates occurred and was substantially maintained month after month. The yield curve inversion -- the 800 pound gorilla in the living room -- was derided whenever it was not ignored. The monetary fraternity remain united solidly in its consensus view that the big risks down the road were an OVERHEATING ECONOMY and RISING INFLATION. Safely ensconced behind their intellectual Maginot Line, the Great Ones (including in their company the illustrious Dr. Bernanke, who "explained" to us mere mortals that the curve's inversion was the consequence of a "savings glut"), they disdained anyone with the temerity to question the accuracy of their sacrosanct pronunciamentos.

Today, all of those who were COMPLETELY WRONG -- as wrong as you can get in the economic forecasting business -- are once again sending forth their solemn edicts: we are headed for RECESSION!! Some of the more intellectually daring of this sad coterie are even hinting at the possibility of DEFLATION! What a remarkable insight? Anyone who has a house for sale, has recently sold a house, or has two eyes and two ears could tell the Sages that house prices are GOING DOWN. Declining prices, of course, EQUALS DEFLATION -- at least in this one, not insignificant, economic sector.
Now, those who should have been sounding the tocsin 12-15 months and ADJUSTING MONETARY POLICY APPROPRIATELY would have us forget that they actually continued raising interest rates and draining liquidity from the banking system even as the most historically reliable of all forecasters -- the structure of the yield curve -- was giving the unmistakable recession/deflation signal.

Now, not a day passes that a new economic luminary does not issue his/her solemn RECESSION WARNING. Kind of like the fireman who assures you that everything is fine even as the brush around your house is getting thicker and thicker, the foliage is getting dryer and dryer, the winds are picking up, and the fire season is approaching. The WARNING from the fireman comes only when your neighbor's house is in flames: A FIRE IS NEAR! NSS.

The relevant question for investors and businessmen is: what use, if any, can we make of the analytical detritus which is almost invariably wrong? Of what utility are assurances that all is well (issued at the very moment serious warnings are in order) and later, of warnings of imminent disaster when same is obvious to a child? Our answer is the following: obeying the dictates of common sense at the very least requires that one TOTALLY IGNORE EVERYTHING that issues from the mouths and pens of these folk. The question of whether one should formulate CONTRARY ACTION is more difficult to answer, but our general feeling is that the consensus, far-behind-the-curve "forecasts" characteristic of the gurus do constitute a largely contrary signal and should be significantly weighted in considering CONTRARY ACTION. After all, by the time this collectivity of "wise men" has finally wised up to the trends and proclaimed its revelations, the markets have, in all probability, ALREADY PRICED THEM IN.