So Much for the Decoupling . . . .
World markets are plunging in response to fears and expectations that the United States will be (or already is) in a recession that will be both long and deep.
Headlines around the globe are rather stark:
Major Indexes Drop Sharply On Worries Over U.S. Economy (WSJ)
Europe Starts to Feel Pinch as U.S. Slowdown Spreads (Bloomberg)
Global markets plunge on U.S. recession fears (CNN/Money)
US recession fears sink global markets (AP)
So much for that decoupling thesis.
What is rather incredible about the past few years are the number of pinheads who so totally got this wrong. Not your run of the mill idiots who insisted Housing and Credit would have no broader impact; These hacks were merely blind incompetent cheerleaders.
No, what really stunned me is the number of otherwise intelligent people who, once again, claimed "its different this time."
Its one thing to be wrong, but its another thing to have your entire philosophical world view invalidated. That included the primacy of seeing what is going in the real world, of understanding what the official government data really means, of not ignoring broad and deep concerns amongst the population.
Its one thing to guess a specific data point wrong -- does anyone reliable forecast NFP? However, its a horse of an entirely different color to stay wedded to a completely invalidated heuristics, or ignore economic truths with a validated and long history.
Consider these statements which we heard over the past few years:
The Yield Curve no longer matters
Earnings at an unusually high % of GDP are sustainable
The Business Cycle has been defeated
Ignore sentiment readings, the population is just upset about Iraq
Real Income gains are irrelevant
Mean reversion no longer applies
Supply side tax cuts pay for themselves
Dow Theory is a quaint antiquity
The (so-called) Fed Model "proves" equities are significantly undervalued
Despite commodity prices, there is no Inflation.
I'm sure there are more, but I'm only on my first cup of coffee.
~~~
QUESTION: What other economic statements, investing beliefs or market philosophies have been shown to be wildly false? What investing beliefs are now revealed as horrifically and expensively wrong?
I do not mean specific calls (but this, sell that), but rather, the larger rules and strategies that are now being revealed as utterly incorrect?
What say ye?
Monday, January 21, 2008 | 08:27 AM | Permalink
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I guess this puts the nail in the coffin to the "stay fully invested in China until the Olympics" theory
Posted by: Walter | Jan 21, 2008 8:47:10 AM
Housing goes up forever
Borrow short, lend long
Record high margins are here to stay
Subprime is contained
Posted by: matt | Jan 21, 2008 8:52:45 AM
How do we know what isn't so. You introduced this concept to me and I read the book.
People who make decisions on how THEY have lived. Every great site I visit (less than 6)are today grinding what is happening across the world this morning. They(world markets)are reacting to how they will be affected by what they perceive our economics effects their society. If we focus on basing at 12000 and a market that should be adjusting between 12800 and 12000 - we should fairly OK tomorrow. However, tomorrow will be "play day" for the traders - should be interesting. Personally, except for very long-term holdings - I am in Cash at the end of every day - Cash has been King since the first of the year. When you are responsible for more than "yours" I guess Hedging all day Tuesday might be the Menu. Just a holiday thought Martin Luther King was a great man!
Posted by: la grande poussée | Jan 21, 2008 8:54:44 AM
Tangential question: When will China achieve a critical mass of consumers? I have long expressed concern over China's control over so much American debt, but everyone around me has said, "They can't afford to wage economic war on the US. They depend on American consumption too much." I just wonder when that might cease to be the case . . .
Posted by: zero529 | Jan 21, 2008 8:56:29 AM
"It's contained"
Posted by: Stuart | Jan 21, 2008 8:57:35 AM
It's the greatest story never told. - LK
Posted by: MAS (Seattle) | Jan 21, 2008 8:58:25 AM
President Bush is an adherent of free market principles.
Posted by: The Dirty Mac | Jan 21, 2008 9:05:21 AM
1st major sticky thing that came to my mind was balance'g the desire to buy and help the economy out vs. not buy and keep my inside of home/office/studio economy balanced
it comes down to my community; county; state; country; global corporate worlds; ... have to help me balance a subsistance lifestyle without borrowing
without the previous paragraph, consessions are required that affects the 1st paragraph ... the 1st being I have combined home & office to exist above water
is that an answer to the deep question?
Posted by: Greg0658 | Jan 21, 2008 9:06:04 AM
"stay fully invested in China until the Olympics"
Good one. From the start that was a bunch of nonsense.
Posted by: Upside | Jan 21, 2008 9:09:32 AM
That there is a so-called "plunge protection team." Why aren't readers on here calling it the "plunge team" now?? Cause it's all conspiracy!
Posted by: House | Jan 21, 2008 9:09:34 AM
My overall belief is that long term relationships mean something. Reversion to mean is key. The mean says we are at the bottom of the long term historical range for the S&P. Outliers are certainly possible, but I go with history for long term profits.
Japan is a permanent outlier and should be ignored, good or bad.
World markets, particularly emerging markets, have picked up considerably over the last several years. Huge capital inflows and a rising standard of living means that their markets have to be evaluated on more recent history. Also, they are more prone boom / bust bubbles.
The housing bubble / yen carry trade bubble has just burst. The bottom did not fall out of the world economy, although the bubble bursts all over may give it that appearance.
A historical look at foreign charts show dips and rises of similar magnitude in sympathy with US markets. They will rise when US markets get their footing again. Emerging markets will rise and fall at greater proportions to US markets until they mature. This is how to make money if you buy at the bottom and never at the top.
The yield curve is distorted because of all the foreign money bidding down the rates on of US bonds. One might argue that the lowered yields are an inflation relief valve. If all that cash were being used for Consumption, then prices would rise dozens of percent.
Ignore sentiment ... maybe. Watch what people do, not what they say. Everybody lies.
Supply side tax cuts pay for themselves ... Only in theory. Tax cuts targeted for Investment never seem to happen. People who use the term Supply Side don't really know what it means. They think all tax cuts are supply side.
On the other hand, broken clock economics can be defined as economics that is occasionally right. If you stick to the same story long enough, the business cycle will make it look like it came true. All broken clocks are right at least once a say. Markets don't go to zero, unless it is different this time.
Money needs a place to go and stability invites risk. The markets will recover and go up again sooner than the majority currently believes.
Regarding inflation, the world is facing something new. The demand for a lot of commodities is outstripping supply and supply will not satisfy demand in a lot of cases. This means the price mechanism must ration supply. Inflation is still a result of too much money chasing too few goods. Deflation is not the cure for supply problems.
Are equities undervalued? Who knows? I'm a believer in the greater fools' theory. For all I know, skyhooks maintain the price levels of equities.
Posted by: cinefoz | Jan 21, 2008 9:10:16 AM
"DEFICITS DON'T MATTER" - Dick Cheney
Excerpt from Paul O'Neill ( ex-Treasury Sec)'s book:
So at a meeting with the vice president after the mid-term elections in 2002, Suskind writes that O'Neill argued against a second round of tax cuts.
“Cheney, at this moment, shows his hand,” says Suskind. “He says, ‘You know, Paul, Reagan proved that deficits don't matter. We won the mid-term elections, this is our due.’ … O'Neill is speechless.”
http://www.cbsnews.com/stories/2004/01/09/60minutes/main592330.shtml
-K
Posted by: sk | Jan 21, 2008 9:11:14 AM
"A smart computer programme can eliminate risk.
Posted by: Old Ari | Jan 21, 2008 9:18:08 AM
sharpest inequalities in wealth and income since the 1920s are actually a good thing
Posted by: scorpio | Jan 21, 2008 9:20:15 AM
ps - reading the local paper I see Hilton is sending a local call center into a home based network
this probably (dont know) sets up IRS-1099 Contractors with high speed internet and other utility writeoffs provided by this mini business model
add saving on daycare, gas and time over roadway and thats a solution with overtones
Posted by: Greg0658 | Jan 21, 2008 9:22:26 AM
John Hussman had an essay on his site a few months back debunking The Fed Model
I blame the Fed for 70% or everything. Their major problems were:
1. Creating the moral hazard that allowed rampant speculation and the two bubbles.
2. Believing their own lies (birth/death model, inflation ex food and energy)
3. Not overseeing the banking system properly, which indirectly allowed wall street to also run amok with derivatives.
Another 15% of the blame goes to the media, particularly Bubblevision and its main characters (Jimbo, Goldilocks Larry, Barudjian...). The other 15% goes to Bush and his policies. He's only been around 7 years and this bubble is over 20 years in the making.
Posted by: Steve Barry | Jan 21, 2008 9:28:59 AM
There is an amazing parallel with the war in Iraq. So many pundits were so wrong about everything going into the invasion. And yet they are still given a platform and treated as if their opinion was valid (Bill Kristol now at the Times.)
None of these Eco-pundits will go away or taken to task over their past bullshit statements.
Posted by: edhopper | Jan 21, 2008 9:37:39 AM
"Buy as much house as you can afford."
Posted by: AlladinsLamp | Jan 21, 2008 9:41:56 AM
Nothing to add here....other than...where the hell is John Devaney (owner, or is it former owner, of the yacht "Positive Carry")these days?!?!?!?!
Has he committed suicide yet?
Is he completely broke yet?
Has his wife left him yet?
Or, is he curled up in a ball smelling of cheap burbone mubbling to himself in the corner of an empty room in his 35,000 Biscayne Bay foreclosure....."I had it all, it all seemed sooooo easy, I really do understand the debt markets, or do I?....."
Posted by: Dumpster | Jan 21, 2008 9:44:53 AM
I'd like to see the European Bank start to lower rates and watch the Fed go down 1% next week. They're going to end up there anyway. Why dribble it out by a piss squirt at a time.
Big problems will happen eventually if the Fed only mills about, as it has historically.
Wages become savings. A lot of that savings is placed into assets that fluctuate in price due to market conditions. Even big fluctuations like the one now is ok providing market regulators respond with something to offset the decline. Right now, we are on a metaphorical roller coaster ride and on the scary part. Few are really panicked, although the noise level may make it appear otherwise.
Now ... assume stupidity. The Fed doesn't act. Asset prices fail to rise, and possibly fall more. Wealth declines and purchasing slows. This will create a deflationary spiral caused by wealth destruction. This was Japan in the 1980s. They have not completely recovered from it, either.
Bernanke is facing the Greenspan dilemma. Lower rates are ok, but leaving them there forever is insane.
If the Fed does not lower rates significantly next week and if Europe does not follow in kind, then new history will be written. S&P trend lines won't matter for a long time coming.
A stable Fed will bring a stable market.
All of my opinion to this point has been based on a rational Fed model. So far, Bernanke hase done everything ok. Now it is time to bring out the elephant gun.
Posted by: cinefoz | Jan 21, 2008 9:46:47 AM
'A rate cut will fix everything' is my fav. It's like trying to reduce drug-related crime by increasing the amount of drugs available.
Posted by: MooPoint | Jan 21, 2008 9:49:02 AM
I love Hussman's piece...just re-read it. The avg. forward P/E given current record margins for the market is 8. The scary implication? Even if earnings estimates are correct for the coming year (almost ludicrous to assume unless you are Abby Joseph Cohen), the S&P using historical pre-bubble data should be cut in about half.
As John says about the Fed Model "Warning...statistical artifact"
Posted by: Steve Barry | Jan 21, 2008 9:49:03 AM
What other economic statements, investing beliefs or market philosophies have been shown to be wildly false?
that BR is a permabear.
Posted by: amry | Jan 21, 2008 9:51:23 AM
Heard on CNBC many times: tech is immune to a downturn.
This will be proven so false as to emit crazy laughter.
Disclosure: Long QID
Posted by: Steve Barry | Jan 21, 2008 9:54:20 AM
"Risk has been tamed."
Posted by: Austin | Jan 21, 2008 9:56:12 AM
