I can’t seem to concentrate on anything specific this morning but given the market is alternating daily between “we’re doomed” and 3% rallies, I’m going to take this as an indication of my general sanity. You may, however, disagree with this thesis after the following random list of thoughts that are competing for full attention.
The Debate: Rarely in human history has the collective gullibility of a populace been as sorely tested than by Herman Cain’s statement that “America wants leadership”. I’m not even talking about the harassment allegations. This definition of leadership, apparently, involves a careful avoidance of rudimentary economic knowledge and ignorance of the established law stating that a sitting Fed Chairman can not be fired. Poor Romney’s primary focus is dumbing down his answers so he doesn’t offend anybody by actually knowing anything, a process which strikes me as less than Lincoln-esque. The audience wants to be appeased, not led anywhere, and the same is true on the other side of the aisle. The odds of anyone becoming president by suggesting a path different, or further, than it already wants to go has to be at an all-time low.
Penn State: Not to beat a dead horse here, but the same psychological traits I discussed HERE as the basis for scapegoating by investors are evident, at least to me, in the all-around disgusting horror show in “Happy” Valley. If the allegations against former coach Jerry Sandusky are proven even mostly true, my initial emotional response will be the same as anyone else – I’d like to see him pulled apart by horses at the 50-yard line. The allegations (I am thinking specifically of some of the allegations being investigated by NESN, reported today) imply an absolute monster, so far beyond the boundaries of acceptable behavior, so inexplicable, that it can’t fit within our framework of what a human being could possibly be. Too random, in other words. The average person’s reaction is so justifiably strong that the dismissal and/or imprisonment of any number of anonymous school bureaucrats are entirely insufficient to sate our outrage. Taking down a legendary coach (who I do not suggest for a second is blameless) is as close as we’re going to come. And no, I am not equating the importance of market volatility and child abuse, just suggesting that the reactions, which should be of different magnitudes, are probably coming from the same psychological place.
A brilliant article and the danger of metaphors. Patrick Chovanec’s “Deja Vu All Over Again” post yesterday was brilliant, providing new support for the validity of comparisons between late 1980s Japan and the current Chinese economy. The part that got me, in light of the fact that China’s fixed investment is at unprecedented levels relative to consumption, were these statements by a former official of Japan’s Ministry of Finance:
Another economic indicator that [we] should have studied more carefully was private fixed investment. In 1988 it suddenly increased by 14.8 percent. The following year saw a big increase of 16.6 percent. In 1990, it recorded an 11.4 percent rise … The indicator’s continuous increase at such rapid rates for three consecutive years should have been more critically examined. Though economists were quick to judge that these investments would not lead to overcapacity because the majority of the investments was directed to nonproductive facilities for employees, they were slow to notice that a part of the robust investment was merely a by-product of too much liquidity [in] the firms concerned.
Chovanec’s post as a whole reminded me of a terrific China-related metaphor concocted by the mega-bears at SocGen. While granting that the Chinese government did enjoy far more control over the economy because of the country’s autocratic structure, they suggested that it wouldn’t help them overmuch. SocGen (either Edwards or Grice, I honestly couldn’t find it) compared the situation to an airline passenger forced to try and fly the plane after both pilots were incapacitated by heart attacks. Sure, all the necessary controls were right there in front of them, but a positive outcome was really unlikely.
As a mid-term China skeptic, I loved the analogy because it perfectly and succinctly summarized my concerns. The tricky part, though, is that perfect communication skills can have very little bearing on the logical validity of a thesis. The fact that the metaphor clearly articulated the argument doesn’t make the argument more true, despite the fact we intuitively assume it does. I can perfectly picture a panicked passenger trying to fly a plane, but this doesn’t mean, in itself, that the Chinese are incapable of engineering a soft economic landing. I can note the similarities of Japan’s historic and China’ current economy, but this does not mean that the outcome will be the same. This is the danger of really good metaphors.
Coming Soon: The next big post will be titled something lie “In Case of Investment Emergency: Break Glass” which, at Reformed Broker’s suggestion, will attempt to provide some perspective on investing in really uncertain markets. Academically, the primary issue is that uncertainty (in this case the possibility of an EMU break-up) can constitute an opaque “time wall” in the near future that makes it impossible to predict future earnings and cash flow beyond that point. This in turn makes it extremely difficult to effectively estimate a value for investments by conventional DCF methodologies. For those who like homework, I am going to suggest attempting to assess what the market environment will look like in 36 months, rather than January, to try and “hop the wall” and get past this.
Final Note: The Interloper blog started only three weeks ago, at which time I fully expected having to beg friends to reach 30 page hits per day. Things have worked out much better than expected in this regard and to those who are primarily responsible for this, please be aware that I internally note appreciation for your support every day. I remain greatly thankful to everyone who stops by to read, whether they agree or not. So, officially, I send out a huge thank you to you, the person reading this right now.