Posts filed under “Really, really bad calls”
We were waiting for the end of the world,
waiting for the end of the world,
waiting for the end of the world.
Dear Lord I sincerely hope you’re coming
’cause you really started something.
-Elvis Costello, Waiting For The End Of The World
In today’s LA Times, Tom Petruno looks at the Zombie Bears: Still betting on economic doomsday — and still waiting. (I have a few choice words in it).
Despite the U.S. economy growing (5 Qs in a row), improving data, and a stock market making two-year highs, to some people, things are still bad and getting worse:
“On the Internet, there is an army of people who will immediately and bitterly dispute anything they read suggesting that 1) the U.S. recovery is real or 2) the global financial system has any hope of avoiding another meltdown.
Barry Ritholtz, head of investment research firm Fusion IQ in New York, calls these folks the “zombie bears.”
“They will not admit the economy is getting better, albeit slowly,” Ritholtz wrote this week on his widely read economics and markets blog, The Big Picture. “They insist the recession was a depression; they insist it never ended. These are the bears who cannot be killed. They will stay bearish, regardless of the data that all but insists otherwise.”
That ought to sting coming from Ritholtz because he was a hero to the bear camp heading into the 2008 financial and economic crash. He had predicted a severe comeuppance after the nation’s long debt binge, and we got it.
But by the time the stock market hit its low point in March 2009, “We already had a massive crisis and collapse, so the worst of what came before was already reflected in equity prices and trader psychology,” Ritholtz said. It was time to reassess.
By refusing to believe that a recovery would follow, the zombie bears have sat out a 70% rebound in the Dow Jones industrial average from its 2009 low — and far bigger gains in many foreign markets.
I spoke with the reporter about the recency effect, about how people’s views are disproportionately shaped not by long term trends, but by what occurred most recently: “It’s human nature to see our present situation, and the future, through the prism of our recent experiences. After living through what was (or is) for many people the worst economic nightmare of their lives, it’s not surprising that we’re now constantly looking over our shoulders, fearful that another crisis is imminent.”
For those of you who like to delve into the psychology of such things, the full column is worth reading . . .
Still betting on economic doomsday — and still waiting
LATimes, November 27, 2010
by James Bianco Bianco Research November 18, 2010 > The Wall Street Journal – Burton G. Malkiel: ‘Buy and Hold’ Is Still a Winner An investor who used index funds and stayed the course could have earned satisfactory returns even during the first decade of the 21st century. “Many obituaries have been written for the…Read More
The Economist asks: “Fifty years after the dawn of empirical financial economics, is anyone the wiser?” My short answer: “Only the people who understand both the data and its limitations, and not get lost in the illusion of precision.” Markets are driven by myriad factors, most of which are readily quantifiable. But the small number…Read More
GM history in the second half of the 20th century is a story of executive arrogance, missed opportunities, poor decision-making and reckless finance. After WW2, everyone was making money hand-over-fist, and GM became known as “Generous Motors.” Starting in the mid-1950s, rather than risk a strike that could slow production and sales, GM chose to…Read More
For many years, I’ve been a fan of Warren Buffett’s long term approach to value investing. Understanding the value of a company, regardless of its momentary stock price, is a great long term investing strategy. But it pains me whenever I read commentary from Buffett that glosses over reality or is somehow self-serving. His OpEd…Read More
“When will these guys ever learn that maybe, just maybe, these Fed policies aimed at targeting asset prices at levels above their intrinsic values is probably not in the best interests of the nation?”
-Dave Rosenberg, chief economist and strategist at Gluskin, Sheff
It is taken for granted that a rising stock market stimulates the animal spirits, sending consumers off shopping.
The basic premise of the wealth effect is well known: As the value of stock portfolios rise during bull markets, investors enjoy a feeling of euphoria. This psychological state makes them feel more comfortable — about their wealth, about debt, and most of all, about spending and indulgences. The net result, goes the argument, is that consumers spend more, stimulate the economy, thus leading to more jobs and tax revenues. A virtuous cycle is created.
The rule of thumb has been that for every one dollar increase in a household’s net equity wealth, spending increased 2-4 cents. For residential RE, the increase is even greater: Consumer spending increases 9-15 cents (depending upon the study you use) for every dollar of capital gain.
The problem is, the theory is mostly nonsense.
I make this statement for two reasons: 1) the distribution of equities in the United States; and b) the classic causation/correlation issue.
Let’s start with equity ownership. The vast majority of Americans have a rather modest sum of cash tied up in equities. 401ks, IRAs, investment accounts — these are primarily the province of the well off. Ownership of equities is heavily concentrated in the hands of the wealthiest Americans. Start with the top 1%: They own about 38% of the stocks (by value) in the US. The next 19% owns almost 53%. That leaves the remaining 80% of American families with less than 10% stake in the stock market (See Federal Reserve’s Z.1 Flow of Funds report for the most recent info).
How is THAT going to cause a wealth effect? Especially when you consider the median family’s stock portfolio is worth well under $50k. These are the millions of families who are the principle consumers of cars, food, clothing, electronics, energy, health care, etc. To them, a rising stock market is nearly meaningless.
The biggest investment for the typical American household remains their home, with a median value of ~$200k. Put 20% down, and you see a 10 to 1 leverage. The impact of Real Estate on any wealth effect is much greater than the stock market. Unfortunately, homes remain somewhat overvalued — 10-15% by our measures — and are in a downtrend. They are not contributing to improvements in consumer spending in any meaningful way.
Our second factor is quite simple: The causation/correlation problem. In the 1990s, the Fed under Alan Greenspan look backwards, focusing on the stock market gains. But I suggest they would have been better off looking at the myriad factors impacting consumer’s psyches: Plentiful jobs, wage increases, economic expansion, labor mobility, modest inflation, and bountiful credit availability. These are sufficient to explain the behavior of consumers. Its not a secular bull market in stocks that causes the consumer spending — its all the other contemporaneous elements that are the prime drivers. [Update 06.26.12: In other words, the same factors that drive a healthy economy and make consumers feel positive also drives equities higher]
Regardless of your views of QE2 — if the Fed is doing it create a wealth effect, they are wasting their time and money.
The Wall St. Journal, and perhaps other outlets, published an open letter to Ben Bernanke pleading for the immediate discontinuation of QE2: We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The letter…Read More
One of the more annoying clichés of the past year has been ““The markets hate uncertainty.” You can always tell when you are listening to an empty-headed pundit when they trot out that old saw. This morning, I have a Bloomberg column on that exact subject, titled “Kiss Your Assets Goodbye When Certainty Reigns.” (or,…Read More
I’ve given up reading anything from the AEI. They are idiot savants, minus the savant part. Its a bore reading the same discredited, data-free memes: The CRA caused the crisis, Fannie Mae caused the crisis, the FHA caused the crisis. Its become embarrassing to read. Their latest release combines all three memes in one giant…Read More
Source: Red State > A friend writes: “What do you do when presented with a chart such as the one above?” My answer was simply that it depended upon who is showing you the chart: • If it comes from a hard core partisan, you laugh at the flaws in their wetware and say nothing….Read More