Bonddad: Hysteria and Economic Blogs: Why They're Best Friends (Posted previously in GD)

[A HERETIC I AM]

And cross posted here with the OP's permission;

Monday, November 30, 2009

Hysteria and Economic Blogs: Why They're Best Friends

Reading blogs that in any way write about economics has generally become an exercise in utter futility. According to most good news is either propagated by corporate whores who are blind to the realities around them or presented without considering "all" the facts. All government statistics and all economists are wrong -- unless they support or present a bearish viewpoint. Then the facts are treated as irrefutable truths presented by intellectual gods. And Goldman Sachs or the Federal Reserve manipulated everything to further some plot. In other words, ridiculous conspiracy theories are far more common than simple factually based analysis. How did things get so out of line?

There are several reasons. The first and most obvious is, "if it bleeds it leads." This is a saying from the days when newspapers were the predominant form of presenting and communicating information. Bloody pictures and sensationalistic headlines simply sold more newspapers. Translate that to the blogsphere and proclamations that the economy is going to hell will probably attract more readers. For reasons that I still don't understand, train wrecks are fun to watch. I'm reminded here of the album by Megadeath titled Peace Sells ... But Who's Buying?

Then there is the issue that many people in the blogsphere were right about the economy. Over the last three or so years, the only people who issued any warnings about the US' economic trajectory were blogs. At first they were the lunatic fringe, the voice in the wilderness. But after the crash happened more people tuned into blogs to get their financial information. Readership increased. But as the facts changed -- as we saw economic indicators start to bottom and then turn positive -- blogs did not change their opinions. The reasons here are two fold. First, many people made a name for themselves by being bearish. Changing their perception would mean giving up the quality that made them famous in the first place and thereby threaten their readership. The second is many people have a preconceived perspective -- that is, some people are fundamentally bearish regardless of the economic environment. Just as importantly, there are some who want things to be bad in order to create an environment where fundamental change is more likely. In other words, these people have a clear political agenda; they simply use economics to accomplish these ends. There is nothing wrong with this. But their bias should be understood and clearly made.

Third, there is the simple fact that people who write about the economy don't understand the economy. Here is a classic example. The unemployment rate is a lagging economic indicator. This means it goes down after the economy starts growing. The intuitive reason for this is simple. During a recession businesses cut production and lay people off. As the economy starts to grow, businesses first increase production and the hours that their existing work force works. Then, as demand picks up more and more, businesses start to hire again. However, reading the economic blogsphere it becomes very obvious that people writing about the economy don't know about this relationship. I'd love to tell you that unemployment will suddenly drop to 5% next quarter. But that's just not going to happen because that's not the way the economy works. Certain things happen at certain times in economic cycles.

And finally there are the conspiracy theories floating around the Internet. According to some the entire crash was orchestrated by Goldman Sachs. According to others, the Federal Reserve is part of a secret plot to do ... something. The reality is the economic meltdown was caused by numerous, inter-related events coming together in what is literally a once-in-a-lifetime perfect economic storm. It's going to take a long time to sort through the mess to figure out what went wrong and how all of those pieces fit together. In difficult times it's easy to scapegoat parties and institutions. The reality is it's a lot more complicated.

So, here's the reality of where we are. The economy is back from the brink; we're no longer falling off a cliff. Last quarter the economy grew by 2.8%. Yes, that was the result of the stimulus -- which is exactly what is supposed to happen at the end of a recession. However, we have a lot of work to do. The unemployment rate is still over 10.2%. Unemployment benefits must be increased and extended. And plans to get the unemployment rate down should be initiated.

http://bonddad.blogspot.com/2009/11/hysteria-and-econom...

Posted by bonddad at 11/30/2009 08:30:00 AM

Hat tip to DU'r Pirate Smile for the find.

[IrateCitizen]

1. Yes, yes. Do not pay attention to that man behind the curtain.

If I wanted a :puffpiece: then I would have tuned in CNBC. Here's a much more sobering view, actually backed up with an analysis of recent economic activity -- and how it doesn't add up according to the "fundamentals" of the days before the crash.

http://www.chrismartenson.com/blog/pumps-full/32142

[A HERETIC I AM]

2. Perfect example of what the author is talking about.

From Mr. Chris Martenson's "About" page

First of all, I am not an economist. I am trained as a scientist, having completed both a PhD and a post-doctoral program at Duke University, where I specialized in neurotoxicology. I tell you this because my extensive training as a scientist informs and guides how I think. I gather data, I develop hypotheses, and I continually seek to accept or reject my hypotheses based on the evidence at hand. I let the data tell me the story.

From Bradblog's page;

When I see an economist with a Ph.D. say, "these numbers are flawed and I can prove it" then I'll listen. But when a guy on a blog with a political ax to grind says the same thing, well, let's just say credibility is an issue at that point.

And from you, Mr. IrateCitizen;

If I wanted a :puffpiece: then I would have tuned in CNBC.

Puff piece or not, the author has a completely valid and irrefutable point and your post proves it in spades. It's too bad you don't like it, but there you are.

[IrateCitizen]

3. Attacking the messenger and not the message.

Interesting. Rather than refute the conclusions of Dr. Martenson based upon his objective analysis of the data, you instead lash out at his credentials (or lack thereof, in your eyes) as reason that his viewpoint should be summarily dismissed.

Such is not a feature of rational-critical debate. It is, instead, a hallmark of the world of publicity that trades in personality and title rather than in the merit of one's ideas. It is indicative of when ideas have jumped the shark into becoming hollow ideology.

Bonddad's viewpoint may be valid based upon the analysis of data from a certain perspective (and I happen to believe that the perspective of economics is a horribly narrow one, but that's also just my own perspective coming into play), but that does not make it in any way irrefutable. Quite the contrary. I think it is extremely refutable the further back one stands and surveys the entire forest rather than a few select trees.

(edited for clarification)

[A HERETIC I AM]

5. The idea that Mr. Martenson is "objective" in his analysis is laughable

First, why the fuck should I be interested in refuting his conclusions anyway? I don't give a shit about the guy or what he has to say. YOU posted a screed of his that is in no way relevant to the piece I posted and now you're upset because I quoted his own damned website back to you. Amazing.

Second, his website is aimed at promoting his DVD and selling gold. That's obvious by just looking at his homepage. That alone makes him somewhat less than objective in my opinion. He has an agenda and you know it, just like most of the bloggers Hale Stewart was talking about. Even though Stewart's blog has a link to his own law firms website, he isn't selling something he isn't qualified to sell.

Rather than refute the conclusions of Dr. Martenson based upon his objective analysis of the data, you instead lash out at his credentials (or lack thereof, in your eyes) as reason that his viewpoint should be summarily dismissed.

Wow. If merely quoting from his own "about me" page is lashing out at his credentials, I can see you and I are not going to agree on much at all, are we? I in NO WAY insinuated his "viewpoint should be summarily dismissed". That is YOUR assumption. But I've read the guy before. He's a scientist that fancies himself an economics wonk. Good for him. AND he's flogging gold. His viewpoint is no more valid than anyone else who writes about the markets that has no credentials in the discipline.

Refute his conclusions? I'm not sure why I should have to bother, but what the hell, I'll take a stab at it. It'll be fun. However, I have a feeling you aren't going to like this either.

But first;

Bonddad's viewpoint may be (and I happen to believe that the perspective of economics is a horribly narrow one, but that's also just my own perspective coming into play), but that does not make it in any way irrefutable. Quite the contrary. I think it is extremely refutable the further back one stands and surveys the entire forest rather than a few select trees.

Pardon me while I raise my voice a bit here, but STEWART WROTE AN OPINION PIECE ABOUT FINANCIAL BLOGGERS. The "viewpoint" you are talking about does not have to be "valid based upon the analysis of data from a certain perspective" because he isn't talking about data at all. He is simply commenting on the propensity of economics bloggers to stay their course, whatever that may be. And he is right.

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Anyway, let's have a look at what the good Dr. Martenson has to say, shall we?
From the first paragraph;

Watching how the markets were instantly recovered from the Dubai Debacle on Friday and today (Monday), and seeing gold and stocks and bonds all floating along despite the crisis is just further confirmation for the idea that the world's liquidity pumps are set to "maximum power."

Or maybe, just maybe the markets took it in stride, in light of what has happened over the course of the last 2 years and reacted as they might be expected to react: In an unexpected way, like a lot of the time.

He then quotes a couple of news stories talking about how the US consumer is pulling back and "One in four borrowers is under water" (perfectly valid points, BTW) but then he says this;

However, our financial markets are telling a very different story, with signs of plentiful, if not rampant, liquidity everywhere. First, in the largest market of them all (by sheer size) is the bond market. There we find staggeringly large Treasury auctions being held week after week with stupendously low yields and suspiciously high 'indirect bidders' (foreign central banks) showing up each week.

"Rampant liquidity". Oooooh....sounds scary. What the fuck does that mean to him, anyway? That there is lots of cash and/or there are lots of willing buyers and sellers for assets? Who knows if that's what it means to him, but that's what "liquidity" means. How the hell is that a bad thing? "Stupendously low yields." Wow. Another scary sounding bit. Perhaps he would prefer the Treasury wait until demand fell to nothing so they would have to issue debt paper at a higher rate. Yeah, that's the ticket. Why issue paper when there is demand for it and it is cheap to do so? "Suspiciously high 'indirect bidders' (foreign central banks)" Oooh. More scary language. So the fuck what? So there is demand for Treasury paper from foreign central banks. Why would that be, oh wise one? I'll bet he really doesn't know, but if he does, he ain't saying so in this bit. The reason is that those banks KNOW that if they buy a bond issued by the United States Treasury department, they WILL get full par value back when the bond matures and if it pays a coupon, they are going to get those coupon payments on time and in full. They also know that if they want to trade them away, the market for US Treasury bonds is liquid, meaning they can and will find a buyer for what they want to sell in very short order. All of that makes those securities a very safe place to put cash. How horrifying for them.

Of course, as my long-time readers know, I happen to believe the mystery can be solved by simply understanding that our bond markets are now subject to large and frequent interventions by so-called non-economic players (i.e. central banks), which do not care about gains or losses.

'scuse me for a sec....:spray: Central Banks don't care about gains or losses, eh? Really?

In the next part he says "The funny stuff I recently saw in the 3-month bill has really left me scratching my head." Yeah. And his interpretation of it has me thinking he doesn't know what the fuck he's talking about;

The funny stuff I recently saw in the 3-month bill has really left me scratching my head. Marked on the chart is one example. I am left wondering why it is that investors show up at auction and pay so much that they receive a 10x worse rate of yield than they could secure in the open market the next day. Who does that? Not regular investors, we can be sure.

First of all dipshit, the chart you are looking at is secondary market data, NOT a chart of auction results. Here is a table of recent T-bill auction results. 90 day paper is auctioned every week. The data on the graph he has in his article does not correlate to the info from the Treasury's website. In other words, he is wrong in his assumption or he doesn't understand how the auctions work or he doesn't understand the difference between the primary and secondary market with regard to Treasuries and or he doesn't fully understand what he is talking about or all of the above. The spike downward that he is trying to make a big deal out of was a one day thing that had NOTHING to do with the auction that occurred on the 19th of November.

Why does the media never question the odd behavior of Treasuries becoming more expensive right before or on the day of a massive auction? (That's what we have YOU for, Doc!) In a normal world, huge quantities of new supply to sell would drive the price down, not up. (Maybe. But the reason prices have been driven up is because there is demand for these securities. Apparently the good Doctor doesn't understand this) There has been a massive flood of money coming into the 2-year issuances as well. (He inserted a chart here) That's quite a run from August. Ditto for the 5-year. (He inserted a chart here) There has clearly been plenty of money coming into these markets. (Yeah, so? Guess what happens to the money "coming into these markets"? IT BUYS BONDS!)

There's really nothing else to say, except that lots of money has been pouring into the bond markets and the major source is not really in doubt - central banks. (Not in doubt? Not at all? OK, I'll take your word for it. After all, you are a Doctor.) Naturally this makes sense, as they are dead-set on getting the credit markets back moving again, (wait a fucking second here. If those banks are buying Treasuries, that means they are spending the cash they have. Something doesn't make sense with his analysis) even if this means punishing savers with low yields and forcing people to take more risks in the stock market. In fact, that last one is a desirable outcome.

Who is "forced to take more risks in the stock market"? The fact is, there is simply no high reward for being in a "safe" security these days. If you want safety, you have to put up with low yields. If you are willing to take on a little more risk, whether you are an Average Joe or a major central bank, there are plenty of other things to invest in, NONE of which are forced on anyone.

This is getting a bit tiresome, so I'll just jump to his "Conclusion"

Conclusion

All in all, I think what we are seeing in the markets is most consistent with, and best explained by, a simple policy of dumping lots and lots of money into the markets. At the same time the dollar leaks away.

When do markets cease to be markets? When they are so distorted by monetary interventions that they no longer provide useful or rational price signals.

Until some form of useful price information is allowed to once again enter the markets, I will consider them to be largely untradeable for anybody but the very good, the lucky, or the well-connected.

I am not sure when this ends, but I am reasonably certain that it ends in tears, because I doubt that policy can trump reality.

While I sympathize with the challenges facing the monetary and fiscal leadership of the world, I remain stubbornly unconvinced that a problem rooted in too-cheap money and too much debt can be fixed with cheaper money and more debt.

On his last sentence, I agree. But unfortunately that is the situation we're in, and if you have to borrow money to fix something, it is a shitload better to borrow it when it's cheap rather than when it's not.

How's that? In depth enough for you?

One last thing, Mr. Irate Citizen;

Such is not a feature of rational-critical debate. It is, instead, a hallmark of the world of publicity that trades in personality and title rather than in the merit of one's ideas. It is indicative of when ideas have jumped the shark into becoming hollow ideology.

Kudos on the flowery language. You're right. I shouldn't point out things people put on their own websites that tend to shoot holes in their credibility. I'm sorry. Now I shall go and ponder the deep meaning of "indicative of when ideas have jumped the shark into becoming hollow ideology" because that statement has ALL kinds of beer drinking written all over it.

[IrateCitizen]

6. Thank you for the detailed response.

I'm unsure as to why it warranted such vitriol, but apparently I touched a nerve nevertheless. The only thing that I can figure is that in questioning the piece you posted, it meant that one of the unwashed laymen was questioning someone who works in the finance industry. I also wasn't questioning the premise that bloggers (and most economists) tend to stay the course, I was questioning the author's premise that we have "turned the corner" and are in recovery mode, because there is still considerable evidence to the contrary -- especially when considering the incredible increase in liquidity on the Fed's balance sheet, combined with the way that people are tightening their wallets in an economy about 70% dependent upon consumer spending. I was interested in some kind of discourse on that issue, and if that offended your sensibilities then I'm not sure there's much I can do about that.

All of that being said and placing the condescension dripping from your post aside, you do raise some good points, especially concerning differences between primary and secondary Treasury auctions, something that I was not intimately familiar with. Basically, in spite of the way in which you came off in your post, I'm still trying to approach this with an open mind and possibly learn something from someone more familiar with the workings of financial markets than a simple historian such as myself.

As for your final comment, I can assure you that there was no beer drinking involved, nor was it an attempt at "flowery language." It was a reference to The Structural Transformation of the Public Sphere by Juergen Habermas, one of the more influential works of the Critical Theorist School of historical sociology. In it, Habermas chronicles the eclipse of the old realm of dynastic rulers by the bourgeoisie with the advent and spread of early capitalism -- and the role that rational-critical debate and a public sphere of letters played in that seismic social shift. It also details the manner in which bourgeois thought gradually turned into ideology as the bourgeoisie solidified their power, thus undermining the public sphere they used to gain power in the first place. Their rebellion against noble title and publicity, in other words, eventually reverted back to emphasis on title and publicity among the bourgeois elite.

As an example, consider the manner in which Op-Ed columnists are read today and their opinions valued by so many of their readers. More often than not, those opinions are valued or dismissed in conjunction with WHO is writing the column much more than what their IDEAS might be. By contrast, consider the way in which the authors of the Federalist Papers, prominent and well-known citizens all, published all their writings under the pseudonym Publicus -- because they wanted their ideas weighed rather than the reputation of the writer. Now, imagine Thomas Friedman, Roger Cohen, George Will, David Brooks, etc. publishing their columns today under a pseudonym so that the IDEAS are weighed rather than the PERSONALITY.

Finally, this emphasis on title and publicity also meant that the free exchange of ideas retrenched into ideology. In that regard, I can think of few greater examples than the manner in which economics is thought of as a "hard science" akin to physics, when in fact it operates according to numerous assumptions, all based upon a pretty short-term historical perspective. This is the sticking point I have, personally, with economics when concepts such as resource depletion (based on geology rather than "laws" of supply and demand), ecosystem degradation, species extinction, and so forth are all considered as a whole picture. Yet, to question the "laws" of economics (which are hardly on par with physical laws such as gravity or even theories such as relativity) is often treated as not worthy of serious consideration -- a turn of events that has much more in common with old ideologies like the Divine Right of Kings than it does with the public sphere of rational-critical discourse.

[Celebration]

8. Bottom line is this

We blame Greenspan's easy monetary policy for the demand for collateralized mortgage backed securities, which ended up causing the whole fiasco. But that little scenario worked fine for the house flippers for a few years--so much so that everything seemed just hunky dorey to the economists.

And, what situation are we in now? Anybody that doesn't see the parallels is just pulling wool over the eyes. And if bloggers are the ones that point that out, instead of credentialed economists, then so be it. It's working now, just as house flipping worked for awhile. But when it falls, it will be fast, and hard. Just wait until the Fed makes the tiniest move or signal to raise rates. Then, come back and face the music.

[westerebus]

4. Wrong, wrong, wrong!

Hysteria met eco blog at a kegger the night some bear took some huge dump in the woods and the friends with benefits tribe invented a bra the opens from the front which was called a leading indicator.

Really! Check you facts.

And bonddad used to date hysteria's sister, chlamydiae. I got that straight from a blind janitor who always turns off the lights when he leaves the room. At least he says he does.



:P

[sendero]

7. Hilarous..

... that somehow one needs "credentials" to see what is happening here.

I have no "credentials" but I bought a bunch of silver and gold in 2006 that is now up 182%. I started preparing for the mess to come in 2006 even though most "economists" were still not sure if we were going to have a "recession" in late 2008.

Spare me the pundits. Most of them are idiots or assholes with an agenda. The agenda right now - kick this can down the road and hope the banks can collect enough interest, fees and whatnot to somehow break even again.

Try to do that in an enviromnent of crushing unemployment that shows no real signs of abating.

It's not going to work but you can't blame them for trying. And for those of you that think everything is just ok? That's great because you are the donkeys that make it possible for us to prepare.

[fasttense]

9. Aside from the unemployment numbers, that bondad claims are a lagging indicator,

The only other actual data posted here is the GDP. Bonddad claims we are recovering based on a positive GDP. But........

GDP rose during the 1st Republicon Great Depression starting in 1934. So, a rising GDP can still indicate another 6 years of major economic turmoil.

Of course if you think 6 years of a continuing depression are indicators or a recovery then I guess you could think 10.2% unemployment is recovery too.

[girl gone mad]

10. Most bloggeers remain bearish precisely because they do understand the economy.

Our bailouts simply transferred a load of bad private debts onto the public's balance sheet. This didn't fix the underlying issues. In fact, the government's actions may have actually http://www.thedailybeast.com/blogs-and-stories/2009-12-01/worse-than-enron/full/">exacerbated our troubles.

The employment picture is not improving, and in a consumer-based economy, employment is not merely a lagging indicator. Whoever wrote the OP seems to have a very limited understanding of the complex relationship between employment, recession, inflation, housing, debt and GDP. Shouting "lagging indicator" has been the one-size-fits-all economic status-quo defense du jour. If only our economy functioned the way those textbooks say it should.. then perhaps this graph wouldn't be such an embarrassment to the current economic team and their cheerleaders:



and this one wouldn't be so frightening: