Monday, December 29, 2008

The Sand Bank

A few days ago, Jon Markman wrote: "My guess is that consumers will have the same response as banks: They'll hoard most new funds that come their way or pay down debt rather than buy more stuff. Obviously, a lot will leak into the economy, but probably not soon enough to make a huge difference."

I've been wondering about this for the past few months. What do the pundits mean when they threaten that the economy will suffer because people are now afraid to invest, and therefore businesses won't have the liquidity they need to thrive? Most people are not going to hide their cash in their mattresses, or put most of their money into gold coins. When they get scared, instead of investing in mutual funds, or fancy pension plans, or directly in stocks, they will put their money in the bank, or use it to buy government securities. Either way, it goes back into the public money pool, whatever they do, and eventually back into businesses, the "economy". Apparently what Markman and Co. are afraid of is that when the public gives their money to the banks, in their current mood the banks will not lend it out again to help business, but will use it in one way or another to cover liabilities already on their books.

But that's OK with me too. If the banks cover their liabilities, they will become more solvent, and will help themselves to return to the state where they will lend to businesses, thus hastening the recovery. And now that the US Government is a large holder of bank securities, covering the banks' liabilities will reduce the Government's liabilities as well, protecting the dollar from too precipitous a fall, which by frightening away foreign investors would also hurt business, as well as hurting our standard of living by reducing cheap imports too steeply. The process will be a little slower than it might otherwise have been, but the money 'hoarded' will go back into the economy.

I still don't understand exactly what's worrying them.


Wednesday, December 03, 2008

BusinessWeek and the Guillotine

Amy Feldman, an associate editor of BusinessWeek recently wrote an article presenting and explaining an interview with Tim Hayes of Ned Davis Research which claims, among other things, that we are in a secular bear market which started in 2000. The timing of this discovery makes me suspicious. It is not hard to yell 'bear market since 2000' in December, 2008, when we all know that the total ROI since then has been, very roughly, -30%, and when many, many others are yelling the same slogan. But people say that the test of a scientific theory - and Feldman/Hayes are of course presenting themselves as being very scientific - is in its predictive value. Where was Mr. Hayes, let's say, at the beginning of 2006, when the world looked so rosy to so many?

That isn't the only thing which bothers me about the article. It ends by saying "The median cyclical bull within a secular bear is a rise of 55%. There have been 18 cases of this. So we are pretty hopeful about the next six to nine months." But if you read the article, you will discover that it includes not even the slightest hint as to when the next cyclical-bull-in-a-secular-bear will start, which would be the necessary logical connection between the third sentence quoted here and the two before that.

And how about what seems to be the theoretical background of the interview? "Tim Hayes looked at the four secular bear markets since 1900... and has defined 18 cyclical bull markets that took shape within them." In other words, he has discovered that the behavior of the stock market surrogates can be seen as the superposition of oscillations of different periods. Didn't Joseph Fourier say pretty much the same thing in the early 1800s? And didn't he suggest that the same description applies to so many natural phenomena as to make it almost useless as a distinguishing characteristic?

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