Streetwise

Lauren Rudd

Sunday, May 12, 2013

Stocks Work - Doomsayers are Wrong

As the Dow Jones Industrial Average moved above the 15,000 mark, bedlam ensued on the floor of the New York Stock Exchange. There were shouts and hand clapping, an unusual show of emotion for that staid institution.

However, it was not the Dow’s metaphorical four digit augmentation that was the epitome of my consternation that morning. Rather it was the seemingly never ending phone calls asking if we were in the midst of another bubble, circa the dot-com or housing boom eras. We are not.

Want it in simpler terms – every time there is a strong market rally the Chicken Little syndrome sets in with financial Paul Reveres shouting, the correction is coming, the correction is coming. The fear of impending doom is simply a promulgation of incorrect assumptions based on invalid data. The difficulty arises when you prattle under the auspices of being a purveyor of truth and rational reasoning.

For example, Robert Schiller, one of the creators of the Case-Schiller housing index says the gain in the housing market cannot last because it is government supported.

Credit Suisse believes it is delusional to assume that you can expect to increase your wealth by investing over the long term in the stock market.

David Stockman, former director of the Office of Management and Budget during the Reagan Administration, says, “Things are not what they appear to be. We are being misled by artificially low interest rates and speculation.”

While there is overwhelming data to refute those statements, thanks to the First Amendment you can, without recrimination, go off half-cocked blathering prose that is tantamount to carrying a sign saying, “Repent now, the world is coming to an end,” or worse be blatantly wrong to those who trust your expertise.

For example, the edifice of austerity economics rests largely on an academic paper that was embraced by policy makers without it ever having been vetted. Published by economists Carmen Reinhart and Ken Rogoff, and touted by policymakers pushing government austerity, it is riddled with what are now well known errors.

For example, there was a failure to include years of data that showed Australia, Canada and New Zealand enjoying high economic growth and high debt at the same time. The errors seriously erode the intellectual underpinnings of the pro-austerity policy approach to government, while making the damage done all the more poignant.

Niall Ferguson, the distinguished historian whose brand of conservative punditry colors his rhetoric on historic events, was guilty of incredulous bigotry at a recent investors’ conference.

Ferguson commented that John Maynard Keynes’ famous statement, “In the long run we are all dead,” stemmed from the fact that he was gay, had no intention of having children and was thus blinded to the importance of long-run considerations.

Ferguson’s subsequent apology would have been more acceptable had not Brad DeLong, a professor of economics at the University of California, Berkeley, pointed out that Ferguson had previously alleged that Keynes' views on the Treaty of Versailles were due to Keynes homosexuality.

Specifically, Ferguson's view is that Keynes had a distinctive gay outlook on the issue and a gay crush on a German representative to the conference that led Keynes to adopt pro-German and pro-inflation opinions.

Interestingly, Keynes’ too-often quoted long run statement appears not in Keynes’ meteoric work, A General Theory of Employment, Interest and Money, but rather in a 1923’s Tract on Monetary Reform. Writing about the fallacy of returning to a gold standard, Keynes stated, “...the long run is a misleading guide to current affairs. In the long run we are all dead.”