Since I started publishing Financial Armageddon in late-2006, I’ve often railed against the incompetence and tomfoolery of highly-paid Wall Street "strategists" (note the double quotes). Many of these so-called experts are clueless data-regurgitators or ivory tower economists with above average communications skills. Indeed, it seems to me that most of the "stars" of the forecasting game are simply being rewarded for having the gift of gab, rather than their ability to look past the trees and size up the layout of the forest.
But as with most generalizations, there are exceptions. Surprisingly — yes, I am cynical — a very small number of those who know what they are talking about, have something intelligent to say, and know how to translate their insights into clear and interesting prose have been recognized as such. I am referring in particular to Albert Edwards, the number-one ranked global strategist for I-don’t-know-how-many-years running, and his sidekick Dylan Grice, who placed second overall in the 2010 Thomson Reuters Extel Survey, both of whom are members of the strategy team at Societe Generale.
In his most recent Global Strategy Weekly, Mr. Edwards touches upon two topics near-and-dear to my heart: the real state of the economy and the utter cluelessness of most equity investors [italics mind]:
The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun.But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious.
The notion that the equity market predicts anything has always struck me as ludicrous. In the 25 years I have been following the markets it seems clear to me that the equity market reacts to events rather than pre-empting them. We know from the Japanese Ice Age and indeed from the US 1930’s experience, that in a post-bubble world the equity market merely follows the economic cycle. So to steal a march on the market, one should follow the leading indicators closely. These are variously pointing either to a hard landing or, at best, a decisive slowdown. In my view we are poised to slide back into another global recession: the data is slowing sharply but, just like Japan in its Ice Age, most still touchingly believe we are soft-landing. But before driving off a cliff to a hard (crash?) landing we might feel reassured when we pass a sign that reads Soft Landing and we can kid ourselves all is well.
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I love the delusion of the markets at this point in the cycle.It bemuses me why investors cannot see what is clear as the rather large nose on my face. Last Friday saw the equity market rally as August’s 67k rise in private payrolls and an upwardly revised July rise of 107k beat expectations. But did I miss something? When did we switch from looking at headline payrolls to private jobs? Does the fact that government is shedding jobs not matter? Admittedly temporary census workers do mess up the data, but hey, why not look at nonfarm payroll data ex census? Why not indeed? Because the last 4 months run of data looks notably weaker on payrolls ex census basis than looking only at the private payroll data (ie Aug 60k vs 67k, July 89k vs 107k, June 50k vs 61k and May 21k vs 51k). But these data, on either definition, look dreadful compared to the 265k rise in April and 160k in March (ex census definition). If someone as pathologically lazy as me can find the relevant BLS webpage after a quick call to the BLS (link), why can’t the market? Because it is bad news, that’s why.
Peter Schiff offers some interesting observations, via Interfluidity.
But to repeat the impact of World War II today would require a truly massive effort. Replicating the six-fold increase in the federal budget that was seen in the early 1940s would result in a nearly $20 trillion budget today. That equates to $67,000 for every man, woman, and child in the country. Surely, the tremendous GDP growth created by such spending would make short work of the so-called Great Recession.
To a degree that will surprise many, the US funded its World War II effort largely by raising taxes and tapping into Americans’ personal savings. Both of those avenues are nowhere near as promising today as they were in 1941 Current tax burdens are now much higher than they were before the War, so raising taxes today would be much more difficult. The "Victory Tax" of 1942 sharply raised income tax rates and allowed, for the first time in our nation’s history, taxes to be withheld directly from paychecks. The hikes were originally intended to be temporary but have, of course, far outlasted their purpose. It would be unlikely that Americans would accept higher taxes today to fund a real war, let alone a pretend one.
That leaves savings, which was the War’s primary source of funding. During the War, Americans purchased approximately $186 billion worth of war bonds, accounting for nearly three quarters of total federal spending from 1941-1945. Today, we don’t have the savings to pay for our current spending, let alone any significant expansions. Even if we could convince the Chinese to loan us a large chunk of the $20 trillion (on top of the $1 trillion we already owe them), how could we ever pay them back?
A related question is whether the American public would consider the offsetting required restrictions on consumption, as documented by Robert Higgs.
File under "Reasons why WWII does not provide a good case for massive fiscal stimulus today."
忍神龟趴趴走的思想工作 