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« ETF Update: Nothing to Love | Main | Why There is No Bottom: Politics »

March 03, 2009



"The question is whether the skills involved in predicting the problem are also the right skills for identifying the possible solutions."

Excellent point. Roubini comes to mind, though the claims he is just being bearish for the sake of bearishness above by Patrick is unfair. He analyzed this very well, it wasn't luck.

The problem isn't that Roubini is a congenital bear (I, and nobody else, has any evidence of that) it is that analyzing the housing bubble, the debt bubble, the incredible overvaluation across asset classes, etc., in no way implies that in knowing what to do going forward he has any necessary leg up on people who did miss that. One might be able to spot all kinds of problems at GE for example as an analyst, but it in no way qualifies you to run it.

"Those of us who care about relevance should know it, and guide others to it. That, plus a bit of focus on the Great Depression, Japan, and how the Crisis is affecting other nations, makes it obvious that this is NOT a "subprime crisis."

I couldn't possibly agree more with every word of this statement.

Josh Stern

Attempts to explain why the stock market keeps falling, and why unemployment keeps going up, and why almost all the news flow is skewing negative can list a lot of contributing factors and agree on the directional effect of each factor, but there simply isn't enough data to have any confidence about factor weights. For example, possible reasons why the stock market keeps falling:

1) Belief that many financial institutions are technically insolvent leads to an expectation of more bad news flow to come.

2) Long term investors are giving up after negative returns for the last decade.

3) Active market participants these days all primarily momentum and growth investors (with negative expectations, who often short on the anticipation of more good news or sell their longs after each negative news item regardless of underlying valuation). This is because long value investors either got in too early and were largely wiped out ove the last year or their funds are seeing large redemptions.

4) People are selling because they need the cash now to make up for shortfalls in income.

5) The market is disappointed with Obama's financial team or his tax proposals.

6) Long buyers are on strike because they've been burned so often.

7) Macro views that the economy will go through a process of adjusting to lower demand levels worldwide and elimination of excess production capacity.

8) Belief that much higher taxes are going to be needed in the future, regardless of which U.S. govt. is in power, to keep up payments on the U.S. debt and to provide social programs to keep retirees out of poverty.

The point is that any of these things could be factors, but there isn't any kind of data available to assess their relative importance.


Patrick - The mainstream economists, as you suggest, were way off in March of 2008, as they would be any time we have a huge economic change.

We are all well aware that some forecasters saw this all as inevitable. If one looks at data, the real collapse came after the Lehman failure and a complete six-week credit market freeze. Apparently everyone needed to see that before policy action could occur.

Thanks for your helpful comment, bringing us all a chuckle as well.


Walt French
Models can be quantitative or qualitative, but are always based upon experience. None of us have the relevant experience for this particular crisis, so our models are suspect.
This is why we have scholars: to record and analyze our history, and determine the relationships, or patterns within it. And economists are the first to try to put bands around how relevant that experience is to our present circumstance.

Carmen Reinhart, whom you mention, has done a great survey together with another economist (Rogoff), of the great financial crises of the twentieth century, only one of which directly hit the US. That ought to serve as a guide to those of us who are trying to transcend our personal experience and capture what history tells us about the present. Those of us who care about relevance should know it, and guide others to it. That, plus a bit of focus on the Great Depression, Japan, and how the Crisis is affecting other nations, makes it obvious that this is NOT a "subprime crisis."

Rather, we have Yet Another Financial Crisis, in which debtor nations (the US, UK, Australia, Spain, ...) and creditor nations (China, Germany, Japan, ...) did a dance that looked individually smart but got us into a world-embracing mess. We took their cheap loans to build McMansions; that worked out badly by putting ourselves deeply in hock while we exported our jobs. They over-invested in export goods production, and are now in the middle of a production/export crisis.

Funny, the CRA, elevated greed and "irresponsible borrowers" are a tiny part of that broader story. Not quite as ridiculous as claiming that 1930's Germany would've been OK had Hitler only brushed his teeth a bit more often, but similarly missing the point.


It would be interesting to see what the WSJ panel said in March 2008...

But your point is correct on both counts. They were right, but any panel with Jim Grant AND Roubini is skewed towards pessimism. lol And you are correct that out of the thousands of professional opinions, someone will be right. They will then be the new guru and they will stop getting quotes from Roubini (until the next bear market which he will be continuously predicting from now until then). Maybe Elaine Gazarelli will have the winning prediction? ;-) She is due.

Mike C

"With equity prices at depression levels, even a moderation in the depth of the recession could be good news."

Just curious what metrics you are looking at in that determination? It does seem to vary across sector. Some of the cyclical sectors like energy and materials do seem priced for a lengthy depression, while some seem to be basically fairly valued such as many staples. I can find energy stocks with P/E ratios under 5 and 1-2x operating cash flow, but many staple names are still trading at mid double-digit P/E ratios. The market seems to be saying we will all still buy our brand name toothpaste, soda, razors, etc. but that energy prices will stay permanently depressed and/or fall much further.

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