Money Sage (archive)

Yessirree Bob. We'd bet our bottom dollar on it. Now that the consensus of guru-dom has decreed that RECESSION is staring us in the face, heretofore "invisible" counter-recessionary forces are starting to make their appearance. Just in time to make monkeys out of the experts for the UMPTEENTH time? We think the chance is 50/50. (Ha, ha. That's our idea of a joke. After all, if Mr. Greenspan, Dr. Summers, and a galaxy of brilliant lights can solemnly intone that the chances of a recession are 50/50, why can't we join in the fun? Has it occurred to any of the guru-groupies on Wall Street and in the financial media that the profoundly intoned 50/50 risk "assessment" is the equivalent to the risk assessment produced by flipping a coin? In fact, we would respectfully advise businesses who regularly pay out fees of hundreds of thousands or millions of dollars for these 50/50 "predictions" issued by the seers to cease paying and instead rely upon the flip of a coin. It would be vastly cheaper and no less reliable).

The generality of the behind-the-curve analysis has missed the forest for the trees this time around, as per usual. They have ignored a very elementary but very important fact: 2008 is an ELECTION YEAR! A PRESIDENTIAL ELECTION YEAR, no less. There is a very good reason why election years have usually been party time for the markets and growth years for the economy. While we may be long past the era when votes were purchased outright for "sacks of potatoes" -- to employ Boss Tweed's terminology for the purchase price of members of the New York State Legislature in the 1870s and 1880s -- politicians in power have a notable yen for remaining in power. Even when the statutory limit on their term of office approaches, they are under a great deal of pressure from those who nominated and elected them in the first place to use every instrument at their disposal to maximize the chances that the succession passes to their fellow partisan, be he Republican or Democrat.

Happily for the incumbent and his party, the government possesses an ample trough from which the electorate -- or at least significant elements of same -- can feed happily. There is a marked, though understandable, reluctance on the part of those in power to LIMIT ACCESS TO THE TROUGH during an election year. Better to fill the trough to the limit than hold back: after all, the central value is at risk: POWER. We find it almost comical to note the speed at which Calvinist moralizing vanishes as the election draws nearer and fear of polticial loss mounts. For those who doubt this cynical observation, we would pose the question: heard much about "moral hazard" lately? The only moral hazard that counts, it would seem, is the risk that the party in power would lose it.

The opening shot in the process of filling the trough and admitting the hungry herd for a feast (which of necessity must last until the DAY AFTER the election) was fired by the eminence grise par excellence, the illustrious Mr. Greenspan. The former FED chairman raised, and by raising and pronouncing upon favorably, legitimated providing CASH to homeowners who are in deep trouble in MORTGAGE-LAND. It is unclear how this newly blessed theological precept issuing from the PROTECTOR OF THE ECONOMY FROM INFLATION comports with the president's reiteration last week that there will be no bailout. Well, never mind. As George Santayana has so trenchantly observed:
"Consistency is the hobgoblin of small minds."

Already the politicians are jumping on the Greenspan-anointed fiscal stimulus bandwagon. (Or, to put it another, more accurate way, the hand-out-the-cash bandwagon). One Democratic hopeful has already called publicly for a $25 billion "stimulus" program. Someone needs to inform this gentlemen that $25 billion these days is VERY SMALL POTATOES. We have no doubt that the bidding has JUST BEGIN. This auction will conclude with the taxpayer -- or his offspring -- picking up the tab. Hmmnn. Who was it that said: "There's nothing new under the sun"?

In truth, we have no problem with fiscal stimulus. Indeed, we have noted that a taxpayer bailout of the banking system, and of those who have suffered and are suffering great pain in consequence of the supplanting of prudence by wild-eyed gambling in the executive suite of the great banks over the past decade, is both necessary and inevitable. What we do take issue with is the apparently incurable analytical ineptitude of the analysts and, more important, the "policymakers" who not only know better but should DO a heck of a lot better. Here we refer, of course, to the central bank primarily, and to the Administration secondarily.

One interesting sidelight on this sudden rush for fiscal stimulus: the COMPUTER MODELS on which the Bernanke FED so heavily relies undoubtedly IGNORED COMPLETELY the likelihood of fiscal stimulus despite the fact that 2008 is a presidential election year. Computers, after all, don't know anything about politicians and public. Nor is any data related to same inputted into the programming for the FED's model, we would guess. Once again we see why it is so foolish and unrealistic to depend upon computer models for forecasting the economy when selfsame models are not inputted with crucially important factors -- herd psychology and, in this case, the self-interest of politicians who hold power, and the influence of those in the opposition who seek it.

As far as the actual economic impact of a fiscal stimulus program, it is of course impossible to reach any judgements since the extent and contours of such a program have not been determined. Moreover, fiscal stimulus works with a lag -- though the immediate dispersion of cash does not. What is important, we think, is just this: things are never so bad as the consensus maintains. They are either significantly better, or significantly worse. The reason, as we have noted repeatedly, is that the consensus LAGS the underlying economic and psychological dynamic by critically lengthy periods. The consumer of financial "news" is always getting yesterday's story in the guise of future prognostication. The fundamental analytical error of projecting into the future an underlying trend WHOSE BASES HAVE ALREADY SHIFTED OR BECOME EXHAUSTED inevitably generates erroneous predictions of the future. For the investor acting upon such "forecasts," the consequences of poor performance or actual loss are all-too-obvious. For the generality of the public, the reliance of the FED upon inherently erroneous computer models, unseasoned by elements of common sense or by a willingness to break the bureaucratic consensus and adopt a politically "incorrect" stance when doing so would actually have a positive impact on forecast and on POLICY MOVES produces unnecessary economic and psychic pain, and reduces the efficient functioning of the economy.

In the endless combat of investors within the financial markets, those with real knowledge, insight, experience, and COMMON SENSE enjoy an immense advantage over the herd which is dependent on outdated news and inept analysis.