The Economy is Just Fine . . .
Nothing to see here, move along, everything's fine.
That's what Gene Epstein, Barron's Economic Beat columnist, and author of the book Econospinning: How to Read Between the Lines When the Media Manipulate the Numbers, is saying in this week's magazine.
I was unsure as to where to begin in taking apart his column -- its not that it is so densely packed with errors (that's a given). Its that the author's worldview is, well, from a different world than ours.
"THESE ARE HARDLY THE BEST OF TIMES FOR THE U.S. ECONOMY. But they may not be as bad as you think. The credit crisis, stock-market crash and fall in home prices have raised legitimate fears of a nasty and protracted recession. Yet the economy has often proved more resilient than is commonly thought -- and constructive factors that have gotten scant attention should help the U.S. skirt a deep recession. In fact, it's possible that the downturn could prove to be one of the briefest and mildest on record.
The main positive is the huge boost to consumer spending that will come from the decline in energy costs. Although the run-up in oil, which punished consumers in the spring and summer, made front-page news, far less attention has been paid to the benefits of petroleum's recent slide...
The cavalry hasn't exactly swept in to rescue the economy. But the energy benefit could keep a significant recession at bay until reinforcements -- particularly inventory rebuilding -- arrive early next year, and as credit starts to flow more freely."
Where does one begin to fisk this? The Cavalry hasn't swept in? You mean to say that nationalizing the finance sector of the US, guaranteeing $2 trillion dollars in lending an deposits, and cutting rates to 1.5% rates -- thats not the cavalry?
And most economists understand why Oil is down -- its called demand destruction. People stopped consuming it, because they cannot afford to. A global recession is deflating all manner of commodities. This is a bad thing, not a good thing.
This is economic cheerleading way, way beyond the ordinary mindless spinning. Its an entirely different order of magnitude. This guy makes my boy Kudlow look like a depressive.
He believes BLS data may be understating how great things are. In 1996, Epstein raised the question as to whether "millions of U.S. workers may be missing from the government's jobs data." That's right, he thinks BLS actually understates employment. I have never seen any questions about understating inflation, the impact on GDP, or any looking askance at Birth Death adjustment. Its no surprise his over-optimistic economic viewpoint has missed all manner of actual issues that matter to investors.
I don't care about any single wrong view or forecast -- its the methodology and body of work that matters. Rather than dissect Epstein's column line-by-line, it might be more productive to cherry pick a few of his prior columns. These are quite revealing:
Hard, Soft Or No Landing (NOVEMBER 6, 2006) The author wrote: "The stock market's rosy view may be vindicated." Only not so much.
GDP Prospects Flash Green (MARCH 5, 2007) The author forecast: "The economy should grow nicely this year and next."
Why Recession Is Remote (OCTOBER 8, 2007) This was precisely at the peak of the last expansion -- we now know Real Wholesale-Retail trade sales peaked in September 2007, and Real Income hit its cyclical high in October '07. (Employment was December 07, and Industrial Production was January 08).
Housing Isn't Clobbering GDP (OCTOBER 22, 2007) It wasn't ? Then why was Q4 GDP = -0.2%?
Look for Joblessness to Hit 5.2% in Late '08 (DECEMBER 10, 2007) Wildly too optimistic -- the Unemployment Rate rate was 6.1% in September 2008, and is likely to rise.
Outside of Housing, Things Are Humming (NOVEMBER 5, 2007) The credit crisis was already 4 months old when this insightful column came out. Aside from GDP being negative, relying on a dirt cheap dollar raises the question of what happens when that dollar rises -- like it has this past quarter.
Slowdown, Not Recession (FEBRUARY 4, 2008) The irony is that NBER is likely to mark the recession starting no later than February, based on their peak-to-trough definition.
Even Money on Recession (MARCH 10, 2008) That's a small change from the column the month before.
The Great American Savings Myth (MAY 28, 2007) Facts have proven this to be clueless nonsense. "Household net worth -- assets minus debt -- has never been higher." As we warned at the time, asset prices can go down, while debt doesn't -- exactly what happened.
Why GDP Will Keep Growing (SEPTEMBER 29, 2008) Thanks to high Imported Oil prices, GDP looks better than it is (high imported Oil makes the deflator artificially raise GDP.
Bottom line: If you make investment decisions based on Barron's Economic Beat columns, you've lost a lot of money.
>
Source:
Sorry, Chicken Little
GENE EPSTEIN
Barron's October 20, 2008
http://online.barrons.com/article/SB122428335256346205.html
Sunday, October 19, 2008 | 08:43 AM | Permalink
| Comments (68)
| TrackBack (0)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef010535986f9e970c
Listed below are links to weblogs that reference The Economy is Just Fine . . . :
Comments
Gave up reading Barron's many years ago as I found it, for the most part, filled with nonsense. My partner had a subscription and I would read it when I sat upon the throne. To me that was the appropriate place to read it, along with the WSJ.
Posted by: grumpyoldvet | Oct 19, 2008 8:51:58 AM
Don't think it's going to matter much that we've dropped, say, 1m bpd of consumption when Mexican production will essentially fall off the face of the earth in about 4 years.
Posted by: zackattack | Oct 19, 2008 9:18:37 AM
I think that many people are still in the denial phase. It will be interesting to see what happens when they start panicking. One of the problems the economy will encounter is that a weak US recovery is likely to get crushed by rising oil prices due to a combination of a falling $ and supply issues that will intervene in the next year or two. The $ rally can't continue much longer, I would say $60 oil might be the low as we head into the winter.
Posted by: leftback | Oct 19, 2008 9:28:25 AM
The problem with Epstein is that he is always trying to explain why the numbers mean something different than they appear to. Occasionally, he is right, but the rest of the time he looks like an idiot.
I think that explaining possible problems with data can be valuable, but they way he actually does it results in him asserting ridiculous things.
Posted by: matt wilbert | Oct 19, 2008 9:34:38 AM
I work with "smart" people, with advanced degrees not in economics.
It is surprising to hear from "smart" folk that 3 dollar gas will save us and that we have now entered the promise land.
NEver mind trillions upon trillions in lossess in both the stock and housing markets as well as the fact that we now have a fourth branch of government, the fed/treasury, created by legislative fiat.
Yean, no problem here, just move along.
Still in Denial
Posted by: LoneLiberarian | Oct 19, 2008 9:52:03 AM
For forecast possibilities, I'd recommend listening to the video over at Capital Gains and Games (the panel discussion at Dartmouth moderated by Samwick). Toward the end of the presentation, you get some forecast #s that may balance Epstein's view. It is at least remotely possible that a recession could last a long time (4 quarters plus) and be more severe (more than 1% contraction) than many believe.
Posted by: nathan | Oct 19, 2008 9:53:53 AM
That article was astonishing in its stupidity.
One point Barry left out, Epstein points to the rise in exports as a big positive. Well, the latest figures, for August, exports fell. With the dollar having risen over the last few months, we'll now see how much of the export boom was really just a fall in the dollar, not an increase in production.
I think grumpyoldvet was using Barron's in the right place, but maybe the wrong purpose. The only time there's anything worthwhile in there is when they interview someone interesting.
Posted by: Bob_in_MA | Oct 19, 2008 9:56:08 AM
Excellent analysis of Epstein; you'd think he'd be embarrassed by his past prophecy failures, but evidently not.
Barron's has always been a propaganda sheet for corporate America, now only much, much more so under new owner Rupert Murdoch, who is without doubt an über propgandist.
Posted by: Dan | Oct 19, 2008 9:56:08 AM
it is not even funny. these individuals are downright dangerous.
Posted by: harold hecuba | Oct 19, 2008 9:58:40 AM
this: The Great American Savings Myth (MAY 28, 2007) Facts have proven this to be clueless nonsense. "Household net worth -- assets minus debt -- has never been higher." As we warned at the time, asset prices can go down, while debt doesn't -- exactly what happened.
As we warned at the time, asset prices can go down, while debt doesn't -- exactly what happened.-BR
that was Animal. A simple glint of a fundamental Truth, reflected into the miasma of a manic Market, should have provided, for anyone paying attention, Star, enough, to track out to safety..
past that, with ol' gov, post #1, Those DowJones pubs have long been enstupified--they can keep their subs, tracking their Newsstand sales provides a useful Thermometer on the, relative, fever of the peep..
Posted by: Mark E Hoffer | Oct 19, 2008 10:06:17 AM
Remember when energy prices were rising and the CW was that the rise would not hurt the economy because energy was a much smaller percentage of GDP than in the 70's? Now the Epstein's want it both ways by arguing that the consumer will get a windfall due to energy prices falling and things will be hunky dory. Wrong on the way up and wrong on the way down.
Posted by: larster | Oct 19, 2008 10:06:53 AM
I was just over at Roubini's site, and he says that those who predict we've hit a bottom in the stock market are categorically wrong; I'd love to hear Epstein's retort to this:
"So risks and vulnerabilities remain and the downside risks to financial markets (worse than expected macro news, earnings news and developments in systemically important parts of the global financial system) will dominate over the next few months the positive news (G7 policies to avoid a systemic meltdown, and other policies that – in due time – may reduce interbank spreads and credit spreads). So beware of those who tell you that we reached a bottom for risky financial assets. The same optimists told you that we reached a bottom and the worst was behind us after the rescue of the creditors of Bear Stearns in March, after the announcement of the possible bailout of Fannie and Freddie in July, after the actual bailout of Fannie and Freddie in September, after the bailout of AIG in mid September, after the TARP legislation was presented, after the latest G7 and EU action. In each case the optimists argued that the latest crisis and rescue policy response was “THE CATHARTIC” event that signaled the bottom of the crisis and the recovery of markets. They were wrong literally at least six times in a row as the crisis- as I consistently predicted here over the last year – became worse and worse."
"So enough of the excessive optimism that has been proven wrong at least six times in the last eight months alone. A reality check is needed to assess the proper risks and take the appropriate actions. And reality tells us that we barely literally avoided only a week ago a total systemic financial meltdown; that the policy actions are now finally more aggressive and systematic and more appropriate; that it will take a long while for interbank markets and credit markets to mend; that further important policy actions are needed to avoid the meltdown and an even more severe recession; that central banks instead of being the lenders of last resort will be for now the lenders of first and only resort; that even if we avoid a meltdown we will experience a severe US, advanced economy and most likely global recession, the worst in decades; that we are in the middle of a severe global financial and banking crisis, the worst since the Great Depression; and that the flow of macro, earnings and financial news will significantly surprise (as this past week) on the downside with significant further risks to financial markets."
Posted by: Dan | Oct 19, 2008 10:15:07 AM
BR said:
And most economists understand why Oil is down -- its called demand destruction. People stopped consuming it, because they cannot afford to. A global recession is deflating all manner of commodities. This is a bad thing, not a good thing.
Comment: On a superficial level, yes. On a fundamental level, oil was never worth $145, except to those who trade in oil prices. And they had the short term ability to force their greed onto the people of the world.
If oil was actually worth $145, then the world economies would have been crushed permanently going forward. Nobody except those who live at the top of the economic pyramid could afford it and purchase other items normally associated with disposable income. Only the most cloistered economist or most avaricious speculator would claim otherwise.
If demand destruction has occurred, great. Much was probably at the wasteful or marginal level. Using less oil is not a bad thing if it is because of more efficiency in the use of it. It is a good thing. Cash that would have gone to oil now will go to other aspects of the economy, fixing it and priming it for expansion in a hopefully more efficient way.
Transferring cash from the pockets of the common person to the pockets of astute commodity traders adds no value to society once the price finding mechanism is met and adequate liquidity has been provided. And no excuse that makes it seem appropriate will change that. Face it, credit and investment is going to shift from people who play hot potato with investments such as bets on the price of oil, to investments that make things and employ people.
Some of this investment will go to industries that allow people to continue to use less oil. So much for demand destruction being a bad thing.
On one hand, you are correct. If oil prices rise in tandem with rising stock prices, then cash will remain king. Only an idiot would put money in the markets because profits for all non oil companies will tank. The next few weeks will tell the story. Will newly flowing credit be used to build things or bet on oil prices?
If I am wrong, then the coming economy will match the one of centuries past ... when wood for daily fires became scarce if you didn't live near trees or when coal was scarce because of population growth vs the mining technology and transportation systems of the day.
Posted by: dead hobo | Oct 19, 2008 10:36:59 AM
To pick up on a discussion we were having in an earlier thread, I did a lot of thinking on Saturday (this is what I do on weekends, unfortunately), and I think it is less constructive to consider price/sales or price/dividend than price/earnings when attempting to value the market as a whole. Here are my reasons:
Price/sales: this would be the least constructive in my opinion. Price/sales considers nothing of underlying profit margins. I'm just speculating, but wouldn't the profit margin for a manufacturing-based economy be far less that that for a services-led economy? Wouldn't it be misleading to compare the price/sales ratio during the Great Depression to that of today's economy?
Price/dividends: I may be mistaken, but haven't dividend taxation laws changed substantially over time? Doesn't a corporation's incentive to distribute dividends or retain earnings fluctuate given different dividend tax rates? Again, wouldn't this make a comparison of price/dividend ratios over time apples-and-oranges?
It just seems to me that price/earnings ratios are a cleaner method of macro valuation and historical comparison, obviously if you use a multi-year moving average of earnings, and not just trailing 12 mos. or (god forbid) expected earnings.
Posted by: Adam | Oct 19, 2008 10:42:28 AM
BR said:
If you make investment decisions based on Barron's Economic Beat columns, you've lost a lot of money.
comment: This has always been true. The current economic situation has no bearing on the fact they are almost always wrong, except when they are accidentally right on occasion. Dog bites man.
Posted by: dead hobo | Oct 19, 2008 10:50:16 AM
Gene Epstein is an idiot, but why waste
cyberspace discussing about some whacko
that is confused about reality??
Posted by: rickrude | Oct 19, 2008 10:55:42 AM
The question that I have is, to what extent does Gene Epstein write what he believes, and to what extent is he pressured by the editors of the magazine to adopt one perspective or another? The same question applies to the journalists on CNBC. If left to their own devices, would any of them admit that sometimes it is best to avoid the stock market on the long side?
Posted by: DL | Oct 19, 2008 11:32:14 AM
How can this guy work in the same building as Alan Abelson?
I'm not sure which article it was but a few yeas back Mr. Epstien gave this explanation that when one of the diffusion indices was actually at 47 plus - or so - actually meant it was more than fifty percent.
It's called Algebra my good man.
Posted by: VennData | Oct 19, 2008 11:39:12 AM
Dead Hobo, they say that dried human dung burns well, especially if you eat a lot of grains! lol
Posted by: JustinTheSkeptic | Oct 19, 2008 11:40:14 AM
"....This is economic cheerleading way, way beyond the ordinary mindless spinning. Its an entirely different order of magnitude. This guy makes my boy Kudlow look like a depressive...."
Barry:
He outKudlowed Kudlow,.... That's quite the achievement, wouldn't you say...?
Best regards,
Econolicious
Posted by: ECONOMISTA NON GRATA | Oct 19, 2008 11:41:37 AM
is the baltic dry index a leading economic indicator because it seem's to be cliff diving also pakistan tried to borrow a couple billion from china china refused said that they done due diligence these are not good thing's are they
Posted by: bullpin | Oct 19, 2008 11:50:33 AM
If you walk in a circle, are you making progress?
Banks will not lend because they fear the loans cannot be repaid, so the Fed and the Treasury is dumping trillions into the system so the banks will lend, yet lending to those who couldn't repay is what got us here to start.
I am so confused!
Posted by: Winston Munn | Oct 19, 2008 11:52:55 AM
(yuck, no coffee yet) Fed and Treasury are
Posted by: Winston Munn | Oct 19, 2008 11:55:38 AM
While I definitely agree with your basic criticism of the article, I think it is asinine to say that oil has been cut in half simply due to demand destruction. I mean just how much demand has been destroyed since July? What would that make the price sensitivity to demand if oil dropped 50% due to a modest decrease in demand. If that is the price dynamic for oil, it will be $1000 per barrel by 2020.
In my opinion, there are definitely speculative forces at work in this equation. Oil prices have recently fallen off a cliff, just as they seemed to jump up one near the high price. I am looking for a bounce soon, as the short trade unwinds.
Finally, with the crack spread where it is, refiners should be making a killing...
Posted by: Alex Sebastian | Oct 19, 2008 11:56:05 AM
The main positive is the huge boost to consumer spending that will come from the decline in energy costs. Although the run-up in oil, which punished consumers in the spring and summer, made front-page news, far less attention has been paid to the benefits of petroleum's recent slide...
I didn't even keep reading after this. Is this guy serious? So let me get this straight, oil is going up, that's why the market is having a hard time (couldn't be the credit crisis or the shit economy right?) and now, we are just going to take off because gasoline prices are coming down.
What a joke, you can do some simple math to realize that this isn't going to bring the consumer back. The family budget is still pinched (food, healthcare, college, etc. etc.) and the averaged consumer still too levered up (mortgage, credit card, auto loans, etc.) My guess is the current drop in gas prices will not provide a greater annual savings for the average consumer than the $600 given for the stimulus, we saw how great that was for the economy.
Anyone who thinks that the consumer will lead us out of this simply does not understand how tapped out the average consumer is. Why would I want to get excited about a consumer expansion or spending spree anyway, we need real expansion, not a new round of over spending.
Finally, this was never about oil, it's about housing and until you go to the source we have problems.
Posted by: ben | Oct 19, 2008 11:58:05 AM
