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Generational Dynamics Web Log for 3-Sep-2010
3-Sep-10 News -- Financial expert Jeremy Siegel makes no sense at all

Web Log - September, 2010

3-Sep-10 News -- Financial expert Jeremy Siegel makes no sense at all

PIIGS countries are facing worse debt crisis, while Germany thrives

TV interview with Prof Jeremy Siegel makes no sense

There are many aspects of today's world that fascinate me, and one of the greatest is the similarity in unrealistic attitudes between now and the early 1930s.

When I was in school in the 1950s, there was a great deal of talk about the Great Depression, and there was one theme that my teachers repeated over and over: How journalists and politicians of the time would predict that the 1929 stock market crash was a temporary dip, and that it would start going up again the following week or month or season. Prosperity was always just around the corner. How could so many people consistently gotten everything so wrong, time after time after time? Couldn't they learn from their mistakes? Why did they make the same mistakes over and over?

So what's fascinating to me today is to see exactly the same scenario playing out in real time, as exactly the same kinds of mistakes are made by exactly the same kinds of people in exactly the same way.

Some of you may not remember, but this was supposed to be the "Recovery Summer" for the Obama administration.

As far as I can tell, they bet all their chips on this strategy. They pushed through the monster health care bill and wasted time and effort on all sorts of other things, because they REALLY BELIEVED that the economy was going to recover dramatically this summer.

In fact, prosperity has always been just around the corner since the financial crisis began in late 2007. There were people on CNBC or Bloomberg TV constantly saying that the economy would pick up in one or two quarters. First it would be the last half of 2008, then it would be early 2009, then it would be the last half of 2009, then it would be early 2010, and then it would be the "Recovery Summer."

It's hard for me to convey how astonishing it is for me to be living through this, to see this puzzle that occupied many of my teachers in the 1950s be repeated right before our very eyes.

Jeremy Siegel

Jeremy Siegel

So on Tuesday, I saw a Bloomberg TV interview with Jeremy Siegel, professor of finance at the Wharton School of Business. This interview seemed to capture everything that's wrong with todays analysts, journalists and professors. He seems to have learned nothing from his past mistakes, promises that prosperity is just around the corner, and even provides almost contradictory reasoning in support of his promise.

Here are some excerpts from the interview (my transcription):

"Q: The Fed is expressing caution, but you continue to be upbeat. What is it that you're seeing that the Fed is not?

SIEGEL: First of all, I am disturbed that there is so much debate about whether they should use quantative easing, if this slowdown continues. This surprised me. I did not think we were going to have this slowdown. I do think we're going to have an acceleration by the fourth quarter for a number of reasons.

I want the Fed to to be ready to use more QE [quantitative easing] without a fight in the FOMC. I think Ben Bernanke was right. It looked like he moved to an easing status from his speech at Jackson Hole, but he obviously has opposition in the FOMC if he wants to move further.

I think that is unfortunate because we're not getting clarity on the fiscal side with the taxes, which I think is a very big negative for the markets, particularly the equity markets.

I want at least a proactive monetary authority that is ready to move if it feels it has to."

Here's where the see the basic internal contradiction in his reasoning, that I find entirely puzzling. He thinks that we're going to have "an acceleration in the fourth quarter for a number of reasons." But then he says that he wants to apply stimulus in the form of quantitative easing.

So what does he believe? Does he believe that there will be an acceleration in the fourth quarter with or without QE, or is QE a precondition? I can't figure out from the interview which he means. And this is where I begin to wonder whether he's lying to get on television.

The way the QE works is that the Fed purchases bonds and other financial assets from companies, in order to give them cash. For example, if a bank holds a billion dollars in mortgages on its books, the Fed could purchase the mortgages, so that the bank would have a billion dollars in cash to buy more mortgages.

This is what he's proposing: that the Fed purchase all the securitized loans that banks have on their books -- credit card loans, mortgages, etc. -- so that banks will have the money to make more loans. He calls this "lowering of risk premiums" -- that is, making it less risky for banks to make loans.

There are two problems with this proposal. One is that it's already been tried, and the Fed has a couple of trillion dollars of these assets on its books, but it hasn't worked.

And the second problem is that the mood of the public has changed, and is increasingly opposed to these unchecked and uncontrolled stimulus and bailout programs.

He defended quantitative easing in the case of Japan:

"I think we would get bang for the buck. I think QE or quantitative easing got a bad rap - people say it failed in Japan. The truth of the matter is it really didn't fail in Japan - they planned to actually stop, after a given period. It did stop the deflation. And I think that it would support prices and assets and the economy if we move forward on that."

This is an absolutely remarkable statement. As I reported a few days ago, Japan has recently announced its 17th consecutive month of deflation. Japan is still in a deflationary spiral 20 years after its stock market bubble crashed in 1990. So what on earth does Siegel mean?

His sentences were fairly garbled, so perhaps he meant that Japan only tried QE for a while, and while it was going on, it stopped deflation. But even in that interpretation, it misses the point. What these stimulus and bailout programs are supposed to do is "jump start" the economy so that the bailout programs can start, and the economy can become "self sustaining." If that doesn't happen -- if the money is simply wasted, and doesn't do any permanent good -- then what's the point of spending the money? You're only using up resources and wasting them.

This situation with Japan is really serious, and ought to give anyone pause. Ben Bernanke is known to have believed that deflation is impossible in any economy based on "fiat currency" -- that is, currency that's not limited by some gold standard. In such case, according to the theory, the central bank can just issue as much money as necessary to prevent deflation from occurring.

What's amazing to me is that so many economists still believe this, even though the Japan case clearly proves that its wrong. What's wrong with these idiots? How can Siegel point to the Japan case that so clearly invalidates his case?

One of the problems that Siegel identifies is that more "clarity" is needed on taxes, and he's counting on Congress to provide that clarity. He was asked why on earth he believes that's going to happen:

"Well, something's got to be decided on taxes.

I think that the market is anticipating absolutely the worst - a total lapse to th pre-Bush taxes, which is a sharp increases in taxes, which is not going to be good for stocks and the economy. I don't think it's going to be that bad. I think that there's a game of chicken going on between the Democratic congress and the Republicans.

And I personally think the Democrats are going to have to step back, because this election is not looking good for them, unless they bring some clarity for the economic outlook. So I do think we're going to get some resolution there.

And this worst case scenario, which I think that investors are now looking at, is not going to materialize."

This is about as close to total fantasy as I can imagine. There's a great deal of political debates these days is whether to extend the Bush tax cuts that will expire on January 1. President Obama was highly critical of these tax cuts during the campaign, and he'd rather have all his teeth pulled then see them extended. There is no chance that they'll be extended before the November elections, though there's a possibility that they'll be extended after that, before January 1. But that will be too late for Siegel's scenario, so what Siegel is saying is total nonsense.

So once again, what does Siegel believe? Does he believe that there'll be prosperity in the fourth quarter no matter what happens in Washington? Or does he set these impossible preconditions? Or is he simply lying? I have no idea. All I know is that he's reciting the kind of nonsense that one can hear all day from these financial experts on TV.

Recall the following GDP growth table that I posted a few days ago, after the Commerce department issued a disastrous 2nd quarter GDP report:

        Quarter      GDP Growth rate
        -------      ---------------
        Q1 2009      –4.9
        Q2 2009      –0.7
        Q3 2009       1.6
        Q4 2009       5.0 
        
        Q1 2010       3.7
        Q2 2010       1.6

What this table shows is a steady decline in GDP growth for three quarters in a row. Many analysts are concerned that GDP growth is going to turn negative in Q3 (this quarter), signalling the start of a "double-dip recession." But not Jeremy Siegel:

"I still do not think a double dip [recession] is in the offing, and I still think that the fourth quarter - we're going to see 3% [growth in GDP] and that's gonna bring us momentum into 2011. So we have really a two quarter soft patch -- we've had them before -- coming out of recessions - I think we'll get a little clarity again on the fiscal side, if the Fed isn't afraid to do some more quantitative easing, just to bring down some of those risk premiums. I think the market is really looking for that, and that's what we need to turn the psychology a little bit positive. I think when people see the world is not falling apart, and that we can move forward in our economies, that's when the recovery's really going to start in earnest. ... I think that this quarter, the 3rd quarter's going to be slow again, but I see an accelaration of 3% into the fourth quarter, and 3 to 3 1/2 % in the 2011. And that's what I think will bring the market back. Once [investors] see its growth."

These two paragraphs represent the heart of his reasoning -- and there's nothing there. The fall in GDP doesn't matter because we've had "soft patches" before. We'll get "a little clarity" on the fiscal side because Congress will do as he demands. Throw in a little psychology, and happy days are here again.

In the end, he predicted that the S&P 500 index will rise to 1250 or 1300 by the end of the year. He had expected the stock market to be much higer at this time, but he says he was wront about that. But he's certain that he's right about what will happen by the end of the year. This time it's different.

I want to emphasize some things I've pointed out many times before. Mainstream economists like Siegel didn't predict or explain the tech bubble, or why it occurred in 1995 instead of 1985 or 2005. They didn't predict and can't explain the real estate bubble, the credit bubble, the credit freeze, the financial crisis, or the worldwide trade and transportation freeze. They can't explain what's happening today, and they have no idea what's coming next year. Everything they say is lying or guesswork.

I wanted to present these excerpts to show how vacuous these people are. But what about the puzzle that's been bothering me since the 1950s? Do I yet have an answer to what's going on today, and what happened in the 1930s?

One thing that I notice when I listen to Siegel or any of the people I see on CNBC or Bloomberg TV is that they have absolutely no historical grasp whatsoever. They believe that economic problems are cause by some kind of public malaise, and that if you can only snap people out of it, then the economy will return to normal. In the case of the stock market, I've noted before that analysts think that only the past 200 days of stock prices are relevant to what's going to happen next.

From the point of view of Generational Dynamics, this is completely wrong. The 1929 stock market crash and subsequent Great Depression created risk averse generations that rarely even went into debt. By the 1990s, these people all disappeared (retired or died), all at once, leaving behind generations born after the Great Depression who had no sense of the dangers of the abusive use of debt.

Mainstream economists simply have no concept of this, as I've said many, many times. They don't understand how the Great Depression created a population wave that's affecting us today. They can't grasp that a generation born in the 1920s-30s has completely different attitudes towards money and debt than a generation born in the 1960s and 1970s, and how that can mean that the worst today is far from over.

There's nowhere to go but up

One of the most hilarious news stories these days is this one from Bloomberg:

"The U.S. economy is so bad that the chance of avoiding a double dip back into recession may actually be pretty good.

The sectors of the economy that traditionally drive it into recession are already so depressed it’s difficult to see them getting a lot worse, said Ethan Harris, head of developed markets economics research at BofA Merrill Lynch Global Research in New York. Inventories are near record lows in proportion to sales, residential construction is less than half the level of the housing boom and vehicle sales are more than 40 percent below five years ago.

“It doesn’t rule out a recession,” Harris said. “It just makes it less likely than otherwise.”

The possibility of the economy lapsing into another contraction during the next year is 25 percent, he said in a Sept. 1 report. Harris cut his forecast for growth this year by 0.1 percentage point to 2.6 percent and lowered his 2011 estimate by a half point to 1.8 percent, according to the report."

Once again, one can only marvel at the stupid things that these analysts and experts say. Harris probably makes hundreds of thousands or even millions of dollars a year, and he comes up with this nonsense.

Here's one other example. I was listening to Stuart Varney on Thursday morning on the Fox Business Network. I don't have an exact transcript, but he said that a Republican victory in the November elections would give such a jolt to the economy that the stock market would go up and up and up. Where the hell do they get this stuff from?

I'm telling you, dear reader, that I often listen to Bloomberg TV over the internet while I'm working, and I listen to CNBC at other times, and at least 75% of what they say is total, utter nonsense.

So really, I still don't have an answer to the 1950s conundrum. How could the analysts in the 1930s have been so wrong, and how can they be so wrong today? Are they lying or are they stupid? I'm still just as puzzled as I was in the 1950s.

Additional links

The PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) are still in a great deal of financial trouble, while Germany is doing very well, thank you. This "two speed economy" in Europe has a lot of people worried, as "bond spreads" are increasing. This means that Ireland, Spain and Portugal have to pay much higher interest rates to borrow money than Germany does. Greece has the highest interest rates of all, but doesn't have to worry because they were bailed out by the EU and the IMF last May, and won't have to borrow money from private sources for two more years. Financial Times (Access).

Afghanistan's banking system is near collapse, as depositors are panicking and withdrawing money from the banking systems. Unless the U.S. provides aid by guaranteeing deposits, some banks may fail. NY Times

Iran's banking system and stock market may also be near collapse. The stock market has been booming, which is a puzzle in a country where productivity has fallen for 28 consecutive months, and where profitability has been negative for most state-owned banks. It's believed that the booming stock market may be an artificial bubble, where different government controlled companies buy and sell stocks to each other, bossting the price each time. RFE/RL

Red Cross aid workers in Pakistan are facing angry crowds when distributing food. Reuters

Vladimir Putin announced that Russia's ban on exporting wheat will extend into next year, causing a further rise in world wheat prices. Bloomberg

Speakers of a remote Australian aboriginal language do not use words like "left" and "right" when giving directions. Instead, they might say, "When you get out of the elevator, walk south, and then take the second door to the east." These people have a completely different way of viewing the world, and at any time they can always tell you which way is north. NY Times

In Japan, real men go to a hotel with virtual girlfriends. Wall Street Journal (Access)

Heavy drinkers live longer than those who abstain from drinking. Time

(Comments: For reader comments, questions and discussion, see the 3-Sep-10 News -- Financial expert Jeremy Siegel makes no sense at all thread of the Generational Dynamics forum. Comments may be posted anonymously.) (3-Sep-2010) Permanent Link
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Generational Dynamics Web Log for 3-Sep-2010 3-Sep-10 News -- Financial expert Jeremy Siegel makes no sense at all

TV interview with Prof Jeremy Siegel makes no sense

There's nowhere to go but up

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Generational Dynamics Web Log for 3-Sep-2010
3-Sep-10 News -- Financial expert Jeremy Siegel makes no sense at all