Thursday, March 26, 2009
to 7,925, and the S&P 500 gained 18.98
to end the day at 833. Oil
was up slightly at 53.85,
The articles below recite the economic statistics
that were released by the Bureau of Labor Statistics this morning.
U.S. ongoing jobless claims rise 122,000 to record 5.56 million: For
the week the ended on March 21 (last week), first-time claims for jobless
rose to 652,000
the week before last, bringing the four-week
The average of the number of people collecting state unemployment benefits
to stand at 5.33
million (a new record). (This number's a little tricky, since unemployment
benefits run out after six months, or after nine months with the current
three-month extension. Next week, the Bureau of Labor Statistics will
report on the closely watched non-farm payrolls and the unemployment
GDP revision shows 6.3% decline in fourth quarter.
Economists were expecting a 6.7%
drop in GDP,
so this was good news. Orders for durable goods were expected to drop
in February; instead, they rose
But the fall in durable goods orders for January was revised downward to
7.3% from an initial estimate of 4.5%. The paragraphs below, taken from
the article linked above, seem to me to capture the prognostications for a
turnaround in the economy later this year, and for the thesis that the
market quietly bottomed on March 9th.
projections look for GDP
to fall at a 5.1%
annual pace. GDP
is expected to fall 2%
in the second quarter, according to a survey of economists conducted by
is far too early to get bullish on the economy, as a lot could go wrong
between now and mid-year, we still have no evidence that the meltdown in
the labor market has begun to abate, and the federal government seems to
be working very hard to sabotage a recovery',
wrote Stephen Stanley, chief economist for RBS Greenwich Capital.
next paragraph was written by the authors of this article and not by
economists don't expect GDP to grow until the second half of the year,
when the leading edge of the $787 billion fiscal stimulus plan begins to
have an impact. Growth next year is expected to be so tepid that
unemployment is likely to keep rising."
This seems to me to be in direct contradiction to John Kenneth Galbraith,
Paul Krugman and others who have estimated that the fiscal stimulus
package would need to be at
least tripled to fill the projected gap in GDP over the next few years.
Similarly, Secretary Geithner's "legacy" assets plan is deemed
by these economists to be a program that won't have the desired effect of
restoring banks with "legacy" assets to health. Also, there's a
spectrum of opinion about whether the economy will recover this year or
Versus the Real World
Before continuing with the bullish case, there's an
intriguing article that I'd like to introduce: Goodbye,
Homo Econmicus, by Anatole Kaletsky, editor-at-large of the
"Times" (London Times).
What Mr. Kaletsky describes is the idea that for the past three decades,
given political pressure, academic economics departments have been
teaching two ideologies that have no experimental or real-world support:
the rational expectations hypothesis(REH), and the efficient market
hypothesis (EMH). The author says, "Models
based on rational expectations, insofar as they could be checked against
reality, usually failed statistical tests. But this was not a deterrent to
the economics profession. In other words, if the theory doesn’t fit the
facts, ignore the facts. How could the world have allowed such crassly
unscientific attitudes to dominate a serious academic discipline,
especially one as important to society as economics?"
make matters worse, rational expectations gradually merged with the
related theory of “efficient” financial markets. This was gaining
ground in the 1970s for similar reasons—an attractive combination of
mathematical and ideological tractability. This was the efficient market
hypothesis (EMH), developed by another group of Chicago-influenced
academics, all of whom received Nobel prizes just as their theories came
apart at the seams. EMH, like rational expectations, assumed that there
was a well-defined model of economic behaviour and that rational investors
would all follow it; but it added another step. In the strong version of
the theory, financial markets, because they were populated by a multitude
of rational and competitive players, would always set prices that
reflected all available information in the most accurate possible way."
He adds that the efficient market hypothesis (EMH) assumed
that market fluctuations were Gaussian, implying that the odds of a
one-day movement greater than 25% were about one in three trillion. In
fact, four such events have occurred over the past 20 years, beginning
with the Crash of '87. This, he says, should have marked the end of EMH.
Instead, the theory was retained and the facts brushed aside.
The efficient market hypothesis has always seemed to me
to be utter eyewash, consistent with the lament that "The
stock market has predicted nine out of the last four recessions."
The stock market peaked on October 11 as the current economic wave was
just about to break. Equally to the point, valid information is all but
impossible to obtain.
What's crucially important about this article is that
it's saying that the
leading economists of our day are relying on theories that are absolute
eye-wash,. Political expediency has trumped the scientific method (the
emperor's new clothes).
In other words, our leading economists are using
The Cyclical Bull Within the Secular Bear
seems to me to be a companion piece to the above
article. This article contrasts what the author calls the efficient-market
arguments of Professors Jeffrey Sachs and Paul Krugman. This author takes
to task Professors Jeffrey Sachs and Paul Krugman for being totally out of
touch with what's really going on in the financial markets. The author argues
that neither of these ivory-tower academicians take into account the positive wealth
effects as trillions of dollars are pumped into the world's economies, and
forces of pro cyclicality begin to work their market magic."
He contrasts this with hedge fund manager Andy Kessler's description of
insider game that's being played, providing a far more accurate picture of
how things really work in our still juiced-up financial system, and the
role credit default swaps play in facilitating bear raids - which then
have the effect of collapsing economic activity in the real economy (Soros’
reflexivity in action)"
Note that the title of this article refers to the
cyclical bull market within the 2000-2018 super-bear market. Note also
that the author expects the liquidity injected by governments to turn
to the Bullish Case
The basis for optimism seems to be the idea that the
dramatic measures being taken by the Obama Administration will cause the
economy to bottom within the next few months. If GDP falls 5.1% this
quarter, and 2% next quarter, then the case for optimism would seem to me
to be pretty good. By early July, we'll know. In the meantime, this is an
absolute Tower of Babble.
The case for the bullish case might be that certain
signs of spring are appearing. And in this vein, here's a very interesting
piece from Minyanville: .
the Manager of the World's Largest Hedge Fund:
I was once again ready to turn seriously bullish when,
tonight, I happened to read an article about Ray Dalio, the manager of
Bridgewater Associates, the world's largest hedge fund (with $38 billion).
Mr. Dalio is a very thorough analyst of, among other things, what's going
on in the stock markets and the world's economies. Mr. Dalio says, "It
seems very likely that stocks will get materially cheaper. We have to go
through an important debt restructuring process, and a lot of assets are
going to be for sale, huge numbers of assets. And there's going to be a
shortage of buyers."
Obviously, Mr. Dalio isn't an ivory-tower
Today has been a wipeout for me. I'll try to add to
To recap what's happened, consumer spending in 2007
reached 71% of GDP (up from its long-time average of 63% of GDP), driving
the savings rate negative. That's 8% above the historical average rate. In
absolute terms, this would amount to 8% X $14 trillion, or about $1.12
trillion a year above the historical average. (Presumably, if the
government could somehow provide an additional $1.2 trillion to consumers
that they would spend, that should bring the economy back to its 2007
level. But the world has changed since 2007. Giving people that money now
wouldn't induce them to rush out and spend it.)
Now, most people are fearful and have switched from
overspending to saving. To me, this is a little like a situation in which
everyone is standing on one side of a boat, causing it to list
dangerously. Then everyone runs from that side of the boat to the other
side, causing it to list dangerously in the other direction.
Be careful in bear rally
Hugh Johnson has doubts
Mortgage rates fall to record lows; 30-year at 4.85%
Brightening picture lifts U.S. stocks
Durable-goods orders jump in February, surprising economists.
strongly doubt that the February gains represent anything more than
statistical noise in these often volatile data, particularly given that
large downward revisions are often associated with ongoing declines,'
wrote Josh Shapiro, chief U.S. economist at MFR Inc, in a note to clients."
Then just below this: "But
Steve Gallagher, chief U.S. economist at Societe General, said the report
was "consistent with our view for positive real GDP in the second
half of 2009.")
These two paragraphs, supporting exactly opposite
theses, demonstrate the "Tower of Babel" that is the financial