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We’ll Meet Again, Don’t Know Where, Don’t Know When
I was having a post-Departmental Colloquium dinner with a small group of colleagues from the Harvard Chemistry Department in the Spring of 2008 when the subject turned to the then-recent shudderings of the stock market – a topic which at the time was of greater concern than usual but about which none of us actually knew anything at all. One of my colleagues (in fact our host) was an elderly professor with wisps of white hair and mildly expressed yet utterly inflexible opinions—a legitimately brilliant scientist whose certainty, alas, seemed to extended beyond his expertise. He was, in my mind, a model of the reflexively liberal, raised-on-the-Gospel-of-Saint-Krugman scientist that abounds at Harvard and in academia in general. And, despite a recent drop in the Dow Jones Industrial Average on the order of 10%, the professor dismissed any serious worry, suggesting that the ups and downs of the market were just meaningless tides of funny money.
“Rob” I said (not his real name), “I am sympathetic about that. And I too get the feeling that all these billions of created and lost dollars don’t seem to actually make a difference in our lives. But the Wall Street people are sounding a little more frantic than usual these days. They’re talking as though this time it’s really going to matter.”
Of course, the Wall Street people, as it turns out, were quite right, as the market dropped another 20% over the course of a few days in June and then (just to show they weren’t kidding) another 20% or so over the ensuing half year—taking with it down the rabbit hole around $11 billion of Harvard’s endowment. And, just to be explicit, because Harvard ran a substantial portion of its operation on interest from the endowment, that meant that building and hiring freezes, salary cuts, early retirement, and various other features of austerity weighed heavily on the Ivory Tower for quite a while. These days, I understand that Harvard has gone back to burying their money in an environmentally friendly tin can in the back yard, which might be about the only place that it is going to be safe this year.
Because, in case you haven’t heard, there is a real battle royale developing today over all of our collective futures regarding the current (this time equities) bubble and featuring roughly the same cast of characters (some play Bulls, some play Bears, one Oscar nominee plays the Fed Chairman) that oversaw our last catastrophe.
Unfortunately I don’t seriously understand economics and the stock market any better than I did six years ago. But (invoking my droit de scienziato and relying on my Ricochetti audience to chime in with facts and perspectives as they always do) here is how I see the situation:
There is intense debate going on in the worlds of economics, politics, and finance as to whether we will, in 2015, experience the mother of all stock market crashes or whether, instead, we will float along ever higher on the happy cloud that has been making at least some people rich over the last few years (or whether, for a third possibility, we will just muddle along somewhere in the middle). Beyond the diatribes from the punditocracy, there is a mood – maybe it is idiosyncratic – but there’s the feeling that something dramatic is about to happen. I mean, a snowstorm hits and the local supermarket runs out of bread?! Are we all rehearsing for something here?
On the one hand, as the President proudly articulated last week, things are moving along just swell. The economy grew at a rate of 5% in the third quarter, the stock market has gone up a healthy 8% or so in the past year, oil prices have been cut in half and the unemployment rate has dropped to 5.6%. What could go wrong?
The political elite and particularly the left elite (like Paul Krugman) are whistling a happy tune and calling, if anything, for more fiscal stimulus because…hell, money is cheap!
The other contingent of smiley faces right now are the Wall Street grunts—the everyday stockbrokers who make their living on tapping the firehose from ma and pa’s 401ks and piping it into that sunshine machine just downtown from the Bowery. It is their job for the most part to sell equities because they live in the quaint world where the market actually has to go up in order for anyone to make any money.
These are the bulls who come off the assembly line. There are a lot of them. So even if they don’t speak with a whole lot of authority their collective bellow sways a lot of opinion. (They punch, as Obama says, above their weight).
It is an unfortunate feature of their job that these bulls (much like offensive lineman in the NFL) don’t get noticed unless something has gone wrong. You will note, for instance, that Drudge follows the major moves of the stock market. Check it out sometime to see if I am right, but I feel that every time the Dow Jones index drops, oh, 350 points in a day there is a top and center photo on Drudge of some 30-something broker, glasses in his mouth, a buddy leaning over his shoulder, watching a screen that is out of the picture with a glassy-eyed expression of cold horror—like they’re watching the approach of a tsunami from the beach. Have you seen that picture?
So even the Bulls seem to sense that something is, sooner or later, coming.
What about the Bears?
The Bears are rather an interesting lot. There are the everyday stock market analyst Bears running this or that Capital Fund. There are the Republican lawmaker Bears who are Bears by instinct. But most interesting to me is the culture of Uber-Bears (though I am sure they don’t think of themselves that way) who run websites like Zero Hedge (you can find links to their many brethren within) and whose motto on the masthead, (where you expect to see things like “all the news that’s fit to print”) is “On a long enough timeline the survival rate for everyone drops to zero.”
This little community is convinced that the end is nigh. I am not really sure just who they are (anyone out there know?) but they seem to be a kind of Austrian economics-inspired cadre of Wall Street whiz kids. They post articles about the Fed pumping (and China pumping and Draghi pumping) and other morality tales with titles like (just recently) “Lies and Deception in Ukraine’s Energy Sector,” and “Fired Before Hired: How Corporations Rigged the Job Market and Killed the American Dream.”
To say that the perspective is cynical does not convey the picture. Compared to them, Rasputin is as dark as the raincoat girl on the box of Morten’s Salt. And I would not say they are humorless. But the humor is definitely of the Dr. Strangelove variety (like Buck Turgidson: “if the pilot’s good, see, I mean, if he’s reeeally sharp….”).
In its way it makes for some refreshing reading.
But what do they say?
Well, there’s a good argument (intellectually, I mean) to be made, and they make it time and again, that we are, in fact, all cannon fodder and that the only sensible thing to do is to stock up on rice and shotgun shells and get to work on that shelter in the backyard. To wit:
- The 5% rise in GDP was built on consumer spending and most of that came from the increases in healthcare costs.
- The quantitative easing around the world has led to a massive build-up of useless production. It has led, for instance, to a massive overproduction not just of oil but of other commodities like steel whose prices have plummeted in the past few years.
- The Volatility Index (VIX) is not yet at historic highs, but it is rising and when it has risen in the past (prior to major economic collapses) it has risen fast. Oh, and, by the way, the VIX ended up 18.7% yesterday!
- Little tremors like that election in Greece that you heard about are pulling the curtain down on the powerbrokers in the EU and Germany and the whole euro fantasy that a common currency can exist across independent, absurdly profligate welfare states.
Etc., etc.
They make a compelling argument. For those of us who have read Michael Lewis’ “The Big Short” and refuse to give an inch in any cynicism “pie eating” contest, there’s the suspicion of gold in them there hills. The only problem with the Zero-Hedgers – and it’s the same problem that you get all the time with the Austrians – is that they can tell you what…but they can’t tell you when.
Published in General
I reckon I don’t fall squarely into either camp, and, not being an economist, I tend to have some trouble sorting through their various opinions and trying to figure out who’s a crackpot, who’s being reflexively ideological, and who’s actually considered the situation more or less objectively from different angles.
While I’ve got some ideological sympathies with the Austrians, I think you’re right in that last sentence. I often enjoy listening to Glenn Beck, for example, but he’s been shouting that we’re going to be at Weimar-Germany-level hyperinflation by next Tuesday, for the last several years. He actually has used the word “hyperinflation” repeatedly, and while I’m really annoyed by the price of eggs and milk today, it’s not the same as pushing in my wheelbarrowful of $5,000 bills to do the week’s grocery shopping. It’s enough to make you think we might not actually turn the dollar into the Lira in my lifetime!
I think that this opinion was perfectly within his area of expertise. After all, from his point of view it genuinely wasn’t an occasion for any serious worry, because his livelihood as a tenured chemistry professor wasn’t affected by it (ok, maybe he didn’t get quite as many perks as he would have otherwise, but substantively it’s not like the guy ended up living in a gutter).
I have no problem with tenured academics dismissing world events that are outside their area of expertise. It’s when they start to take an interest in such events that I start to worry.
I love the Zero Hedge call out! I think, of course, the information there needs to be used in conjunction with other sources but the site can be very funny and posts stuff you can’t find elsewhere. Just don’t visit too much or your portfolio will be all canned food and bottled water.
I am not an economic guru in any sense, be wary of anyone who claims to be, but I find James Rickards’ discussion of the markets in the lense of complexity theory to be interesting. The analogy he uses is an avalanche. We keep piling on snow, but we do not know when which snowflake will trigger the avalanche. All we can see is the snow piling up. When a trigger event occurs everyone will say “of course, it was X that caused it.” But X won’t be any different than all the other snowflakes.
This obviously does not help much in terms of knowing exact timing, but timing seems to be more luck than anything. I suppose it points to proper diversification being key….just tough to diversify these days when everything appears correlated.
Pleated brings up James Rickards. His books Currency Wars and The Death of Money are an odd mix of what appears to be apocalyptic predictions, but really end up having fairly ho-hum consequences. Basically, he makes the case that the world wide currency devaluation practiced by pretty much country will eventually lead to a new monetary standard. He predicts either a return to a gold standard at somewhere between $5000 to $15000 dollars an ounce, or a new fiat standard based on IMF issues special drawing rights (SDR’s). The ho-hum part is although most people will feel financial hardship, millions of people are not going to starve to death. The other ho-hum part is that he has very little advice for how to profit off the transition to a new monetary system. Not even investing in gold will be a good hedge, as he predicts that in the event of a conversion to a gold standard the Federal government will tax any conversion windfall at nearly 100%. (i.e. The government will take all the profit off of gold investments.) Which means that most people will be able to hide some small profits off of investment in gold (i.e. non-reported gold sales), but not large profits.
In the end, people still need to buy food, clothes, shoes, energy, and housing and our technology and ability to produce these things in abundance will remain. Yes, figuring out how to protect your 401K will be hard, this is why asset diversity is important.
My father remembers watching his widowed mother’s small inheritance (in stocks) drop like a rock in value during the crash of 1928. He was born in 1920 and was precocious and interested in mathematical things.
On the one hand, he has always promoted the stock market as the best and really only sensible long-term investment, whatever its short-term ups and downs.
On the other hand, even he is a bit queasy about putting money into the market right now. Of course at age 94, he is a bit less concerned about the very long run than he used to be ;-)
By the way, his mother and he succeeded, despite the crash, in living through the Depression on the income from that same small portfolio of stocks.
Z in MT – a point Rickards makes in his books which I find interesting is how often the world money system has been rebuilt.
If you say we might have a new world monetary system in 10 years people act like you wear foil on your head and must live in a cave. But, Rickards points out that the world money system was rebuilt after WWI, at Bretton Woods, and when Nixon closed the gold window and we did not all start wearing animal skins and eating wild berries
I agree with you that his thoughts on how to position are not very helpful
A good friend is a fairly famous Bear. His firm has positioned accordingly. Ha can’t say when either but it’s coming by 2021 and it will be a doozy.
I might have a slight problem with some of the points listed above, like QE caused excess production, specifically in oil.
While money was cheap, demand is fairly consistent for oil, although weather and other factors impact demand. It’s mostly inelastic, in terms of consumption, because you still need to drive to work regardless of the price – unless it gets so high you seek cheaper alternatives.
QE made money cheap, and inflated the stock market like a compressor tank, because that money has to go somewhere. New rigs were built to accommodate demand, and because the local (domestic) barriers to entry were less because the price of money was so cheap – ie, it didn’t cost much to finance a hundred million here or there to finance expansion. In fact, CapEx as a component of GDP is a big factor in its growth – but ultimately, you have to be able to sell a BBL at a certain price or you lose money. Ask Saudi Arabia and OPEC.
The larger concern, and I used to agree with this, is that we’d see a lot of inflation after the recovery started, because all those dollars pumped out by QE would eventually have to find a home somewhere, and be spent. The flip side to it, as many were predicting, was deflation, and that seems to be what’s happening now.
It’s two sides of the same coin: Too much money chasing fewer products (reduced demand) tends to drive prices down. Even if people have more money to spend, they might not consume as much. They might save more, which is also a component of GDP – which results in a very anemic recovery, little significant job gain, and aggregate consumption and growth are level.
It will take years for the QE effects to flush out of the economy and something approaching normal returns. Couple this policy with an enlarged USG and increased participation in entitlement programs and it’s not a wonder why unemployment goes down but the economy does not budge.
I can sign on to much of what was covered in the post and the comments so far. I have no economic credentials beyond experience and observation. An observation: It looks as if the paper money monetary system, that can be manipulated at will by central bankers, can remain reasonably stable as long as the country’s productivity is sustained or improved, witness the stimulus provided by reducing interest rates and increasing money supply over the last few years. Inflation, as defined by Washington, has been low and the employment situation has improved steadily since the nadir following the 2008 debacle, again as defined by Washington. But it is this very combination that has made the income inequality gap worse during this President’s tenure. So, even though all seem to be of the opinion that we are in perilous economic conditions, the action taken to ease the pain overall looks as if it benefits those with capital who can take advantage of conditions, e.g. stock market investors, and is detrimental to those already struggling, those facing less than full employment or working for low wages. It all gets complicated and I think it is mostly caused by big government with big spending programs and legal and regulatory practices that hurt small business with little effect on big corporations that do all they can to buy up competitors and buy legislators. I don’t see an unrecoverable crash unless and until the USA becomes uncompetitive with other economies.
I’m pretty convinced that sometime in the next five years we’ll find ourselves entering a conflict that five years after that we’ll be calling WWIII. That won’t be good for anybody’s 401k.
OK. Tell us why we will be entering such conflict significant enough to be called WWIII.
Sorry, but I find it interesting (funny) that you characterize people in Harvard as having been wrong, but the…frankly…crazies at Zero Hedge as a more reasonable alternative.
1) The “reflexively liberal” Harvard professor was 100% right.
Since “Spring of 2008” the stock market is…only…up by about 50% ;)
2) Harvard’s endowment fund…only…earned about 15% returns in 2014. Of course, they’re in the business of also reducing risk for Harvard, not just making returns.
3) ZH has little to do with “Austrians”, of course. ZH is a collection of crazies whose job is to constantly say that the world is going to collapse next Tuesday. Surely, some Tuesday, things will be bad, and the crazies will say “see we told you”.
But it ain’t going to be next Tuesday.
PS: Now, to go back to what I found interesting in the beginning. You start off with a story from 2008, about someone saying that “meh, things will pick up again”, as evidence of them being “wrong”?
But it’s 2015. We know things picked up again, and he was absolutely right. So what’s the take-away here?
“Serenity Now!” is my short answer. Hold it in long enough and it explodes.
I’ve been trying to connect WWI and today lately. There were certain fears then (Britain of Germany’s navy ) and alliances. Then a thing triggered a thing triggered a thing and there you were.
It seems like we have some of that today. Fear and confusion and side-taking and can kicking action and inaction. An IS overreach or something of that sort could topple the first domino and there we go.
As I pointed out, the motto of Zero Hedge is: “On a long enough timeline the survival rate for everyone drops to zero.” But the timeline matters. You think it’s really okay that we only lost six or seven years of prosperity? People lost jobs and a whole lot more in that time. There was real pain and suffering. So maybe your investments have recovered and maybe Harvard’s have too. Others who live closer to the edge are not likely to be so sanguine.
Yeah, but I don’t know how that relates to what you said in your original post.
ZH is always saying that doom is coming next Tuesday. On a long enough timeline, even the idiots of ZH will be right.
Also, so yeah, the markets recovered, and Harvard isn’t burying it’s money in a tin can.
I’m going long in concrete.
What I don’t think most commentators have figured out is that the whole developed world including China and Japan is now stuck in the same low growth, low to negative inflation rut that Japan has experienced for the past 25 years. All the smart crowd thinks the solution is easy money when the only real solution is to either get busy having babies or to get busy by forcing more people to work by cutting entitlements. The developed world has finally conquered material poverty, for most people a second flat screen TV is not enough reason to work overtime. People that are working help the economy to grow, people enjoying an early retirement do not. Is this a bad thing? I am much more worried about the slowing of productivity growth than GDP.
But the US has actually experienced a spike in productivity these last few years, not a slowing. We’re at record levels.
So I’m actually not worried about…anything.
The US is in probably one of the best positions, economically, it has been since the early 1990s. And its precisely because the rest of the world has been slowing down, leaving the US to be one of the few attractive investment opportunities anywhere.
I have no patience with either camp. Predicting the equity markets makes predicting the weather look like an exact science. Yes, it will rain. Yes, it will be sunny. In both cases — at some point. If history is any guide, we’ll have more days of sun than rain. But should I bring an umbrella this afternoon? Plan a picnic for next Tuesday? It’s anybody’s guess.
Oh, but it might be a good idea to invest in a raincoat — just to have in the front hall closet — in case.
What has happened since 2009?
Productivity is a per-unit exercise. With more people leaving the workforce, and level productivity, this metric goes up.
So no, don’t be not worried, to use some hideous English. The rolls of people on foodstamps doubled in the Barry administration. Something like 48 million recipients now.
If you take a look at job gains in the last few years, the bulk of the gains are in lower-paying jobs. Service-level gigs. It’s not a recipe for recovery. It’s not an indicator that there’s a viable recovery going on.
My own state published its multi-year labor outlook last year, and it’s a disaster. The biggest number of projected job openings? Cashiers.
We’re not in a recovery. An inflated stock market due to QE does not create a job, except for the ones in the Fed that require someone to show up every day and press the “create more money” button on Yellen’s desk.
Zero Hedge is a great antidote for the belief that someone is in charge and has this economy/market thing under control, much as participating in sites like Ricochet is an antidote for the belief that someone is currently in charge and has a handle on this policy/politics thing. It plays an essential role, if you remember to strip out the pro-Russian propaganda slant that is a continuing feature of the ZH diet. Don’t forget to affix your Putin filter when you read it.
If you read ZH regularly like I do, you will always walk away knowing something that is not widely known or believed by the regular guy on the street. Some of it may even be true. Mind you, I’ve predicted at least a dozen of the last three or four market crashes/apocalyptic events, so take this with what ever size grain of salt you wish, from grain to boulder. That doesn’t mean that I’m not convinced that there isn’t a big “told you so” moment around the corner.
It’s not a question of “if”, it’s only a matter of “when.” And, as in comedy, timing is everything, isn’t it?
Well, those Harvard MBA’s gotta have a job.
Great comment, mezzrow. I absolutely agree that one of the enjoyable things about ZH is that you get that information that most people don’t know thing. It’s a little like listening to All Things Considered. Except that ATC gives you (liberally slanted) vignettes of things that are far too often “people of color” blandishments with an occasional interesting, out of the ordinary story. Whereas Zero Hedge is right at the metal with the doomsday theme (you wouldn’t, for example, expect to find a story in ZH about a Latina Group in Mesa AZ that formed their own gaming software business to help hire the undocumented peoples who can’t find work due to vile government crackdowns…or that kind of stuff).
And I had to read it twice that you predicted a dozen times the last three or four market collapses. Love it.
As much as I hate agreeing with remarks made in this tone, I think the content is what I was trying to get at in my remarks about my father. He lived through the 1929 crash and survived it just fine, and he confidently believes that, in the long run, the stock market will be all right, unless the entire US collapses, in which case we will have much bigger worries than the stock market crash. The trick is not to panic when the big dips happen.
Z in MT’s comment was on productivity. So was mine.
Now you’re saying, that’s not a good measure. Ok. Depends on what you’re trying to look at. He was looking at productivity. So was I.
And obviously that is not what happens. 3+2 = 5. 2+2 = 4. The productivity of each unit is still 1.
Clearly, that’s not what’s happening.
In which case you’d expect worker productivity to be going down, not up.
No, we’re in a growth phase.
So your these is…the stock market and everyone it is is stupid.
Never a good theses to have.
As for Zero Hedge, it’s always a good rule of thumb that whatever is said in that Ron Paulite alternative universe, is the opposite of reality.
On a cold and gray Chicago mornin’
Corporate profits continue to soar
In the ghetto
Zero Hedge is a fun read, in pieces. It’s been called “doom porn” by a buddy of mine a few years ago; I think that’s about right.
Your math is wrong. The per-unit is based on how many hours it takes to build a widget – or an FTE per widget metric. In your example, every “thing” is one unit. If you divide something by itself, you get 1.
So:
If it takes 500 FTEs to build 10,000 cars per year, that’s a rate of 20 cars per FTE.
If it takes 800 FTEs to build 10,000 cars per year, that’s a rate of 12.5 cars per FTE.
The 500 FTE scenario is more productive – they build the same amount of cars (widgets) with fewer people. That 500 is more productive than the 800.
The catch to all of this is aggregation, and you have examples of professionals from zillions of industries that get paid a flat salary. Like a doctor, they get paid (mostly) the same if they work in a hospital, no matter how many patients they see. But a doctor could become more productive by working more hours, at the same rate of pay, but seeing more patients. His (or her) patients per hour rate will go up, because the divisor will always be 40.
Which is why productivity gains get kicked around a lot. The country might be more productive, but that’s because people are working longer hours to get more done, because companies aren’t hiring. People are working longer, and maybe harder, to hang onto their jobs – so the aggregate worked hours is the same, but more widgets/units are being built/serviced.
Anyway, it’s an interesting discussion. A few years ago (before the recession) there were studies on productivity gains floating around; a big factor that some of the studies concluded was that we were finally seeing an aggregate leap in productivity due to computers, software, etc, that finally affected per-unit metrics. Something akin to the promised land of productivity gains promised in the 70’s, 80’s, and 90’s was finally bearing fruit.
I have zero (hedge) idea if that was true, but it makes a bit more sense. You don’t have the infrastructure overheads now for computers/servers/mainframes that you had just a decade ago. The people needed to maintain that digital infrastructure are fewer than in the past, and ease of use from the user perspective creates gains that are difficult to quantify – but obviously something has been happening.
I still think the gains are at least in part significantly affected by the reduction in the workforce labor participation rate – and that either OT or extended hours are creating the same or more widgets with the same or fewer people.
Off topic, but that song has been stuck in my head since I read the title of this post.