Do a search
is typical: “Wall
Street Gurus Say No Recession in 2008.”
Now do a search
200 times more hits. But when you click on half a dozen, you will
find that they, too, report that opinion in 2007 was that there
will be no recession in 2008. The words “avoid” and “not” predominate.
You can find
one repeated article: Goldman Sachs predicted a recession in 2008
. . . in January, 2008. That’s very late in the process. But it
the number of forecasts of a recession in 2008 is increasing, but
it is nowhere near a majority status.
press never asks: “Is it time to short the S&P 500?” It asks instead:
“What stocks should you buy today that will do well in a recession,
if this is a recession, which it really isn’t, say the experts?”
WISDOM IS REWARDED
got fired for recommending IBM.” That familiar slogan has governed
the computer industry since at least 1960.
got fired for predicting ‘no recession next year.’” That slogan
has governed the forecasting industry ever since 1819, when America’s
first depression hit.
should always be: “More of the same.” In most years, the economy
gets more of the same: 2% to 3% economic growth, year after year,
decade after decade, century after century, back to about 1780 in
the United States. So, the wise forecaster predicts more of the
If he is wrong,
he will not be remembered as being wrong. Virtually every other
forecaster predicted the same thing. If he is right, he will also
not be remembered. But he feels secure. At least he predicted something.
What if he
predicts a recession? If he is wrong, a few will remember. “You
were wrong.” If he is right, he will lose money anyway. Why? Because
his readers didn’t believe him, or if they did, most of them did
not take defensive action, so they have less money to spend on his
advice. “Sorry: I can’t afford your advice any longer.”
times, and it’s a winning proposition for the person making the
prediction. Predict a recession, and it’s a losing proposition for
him and most of the people who read the prediction but refuse to
act, which is the vast majority of them.
also do not like predictions of recessions. Recessions persuade
people to save more money by spending less on consumer goods and
services. Advertisers resent anything that would encourage saving,
unless they are selling investment products. But so much of the
retail investment world is geared to selling stocks rather than
bonds that it, too, resents forthright predictions of recession.
Bonds, which usually move opposite to stocks in a recession, are
bought by retirement funds, endowments, and insurance companies.
All of these are wholesale buyers. They do not make investments
based on the retail investment media’s opinion.
So, the retail
business-information system is weighted heavily in favor of optimistic
When a recession
hits, it catches almost everyone by surprise. At first, the experts
deny its existence, even after it has begun. Then they say it is
temporary, that the economy will soon turn upward. It doesn’t. Then
they predict more of the same: recession.
At that point,
the stock market turns up.
forecasters run in packs, they do not suffer when things turn out
differently from their forecasts.
This is another
aspect of recession to consider. The NBER is the official referee
regarding what constitutes a recession. This is the National Bureau
of Economic Research. It is a private, non-profit organization.
It rarely identifies a recession before a year after the recession
has begun. But since few recessions ever last more than 11 months,
the NBER is able to hedge its bets. It tells us that there was a
recession, but it’s over.
around. The media can revert to “no recession next year.” They got
blindsided in 1982, when a second recession hit, but this is extremely
The NBER is
widely believed to define “recession” as two consecutive quarters
of shrinking GDP, which is called “negative growth.” This is a misperception.
As we read on its site:
The financial press often states the definition of a recession as
two consecutive quarters of decline in real GDP. How does that relate
to the NBER’s recession dating procedure?
of the recessions identified by our procedures do consist of two
or more quarters of declining real GDP, but not all of them.
The NBER doesn’t
actually tell the media what criteria it uses to define a recession.
Instead, it announces
recession is a significant decline in economic activity spread across
the economy, lasting more than a few months, normally visible in
real GDP, real income, employment, industrial production, and wholesale-retail
sales. A recession begins just after the economy reaches a peak
of activity and ends as the economy reaches its trough. Between
trough and peak, the economy is in an expansion. Expansion is the
normal state of the economy; most recessions are brief and they
have been rare in recent decades.
Vague? You bet!
This vagueness keeps the NBER from receiving future criticism from
people who think there was (or was not) a recession. This is superb
marketing. It’s win-win . . . for the NBER.
The NBER forecasts
nothing and then gets to interpret what actually happened long after
it happened. So, when you think “NBER,” think “20/20 hindsight with
The NBER is
an organization set up in 1920 by economists for employing economists.
It gathers statistics and releases reports. What anyone other than
economic historians does with these reports is a mystery to me.
But as an economic historian man who loves statistics provided free
of charge, I do appreciate what the NBER does.
LOSERS WIN BIG
By now, you
have heard all about Countrywide Financial, the mortgage company
that specialized in making subprime loans. It got paid lots of money
for packaging these loans.
How much money?
Enough to make its
founder and CEO very rich. In 2006, he made just under $142
million. That placed him at #8 in the United States.
On May 8,
2006, the Los Angeles Business Journal ran
a brief story on Mr. Mozilo.
. . during a trip to India last month, Mozilo told that nation’s
Economic Times that he has no intention of stepping down
from his job, and that he believes he should be paid well, as should
should feel like a part of an organization and reap its rewards,”
He was forced
to resign last month when Bank of America bought his company when
it was facing bankruptcy. This
saved Mr. Mozilo’s $23.8 million pension and $20 million in deferred
rewards is one of the great benefits of efficient production in
a free market economy. But when “efficient production” is defined
in terms of operating with fiat money produced by the Federal Reserve
System, what is “inefficient production” when the FED reverses policy?
What about rewards then? Not too bad if you’re at the top.
Was he caught
flat-footed? Yes. Was he blindsided? No.
2006, a Las Vegas banker named Doug
French wrote an article about the coming crash in Las Vegas
real estate. He began his article with this tidbit:
Mortgage CEO Angelo Mozilo believes that the “housing market officially
turned south in January,” according to Banc Investment Daily,
and that some overheated markets may see prices plunge by up to
40 percent. Mozilo mentioned Las Vegas as one of those risky markets.
on to say that nobody in Las Vegas took this warning seriously.
in Countrywide Financial also did not take it seriously. Its stock
price stayed in the $45 range throughout 2006 until February 1,
2007. Then it began to fall. It
fell below $5 in January when Bank of America bought the sinking
You have heard
about the severance pay package for Stan O’Neal of Merrill Lynch:
over $160 million. In the fourth quarter of 2007, Merrill lost $14
billion. Then there was Charles Prince of Citigroup. He departed
in November with $94 million in stock holdings. Citigroup lost close
to $10 billion in the fourth quarter.
What is the
lesson for investors here? This: big losers win big. Big winners
What is the
lesson for decision-makers in high places? “Go for broke.” The government
or some bigger fish will bail out your mistakes if the mistakes
are big enough. You will keep your pension. You may even keep your
severance pay, if the contract is in writing.
In a highly
leveraged (debt-driven) economy that operates in terms of the assumption
of “too big to fail,” you can fail big and still win big. Your negative
sanction — getting fired — is more profitable than the
most positive of sanctions facing 99.99% of all corporate decision-makers.
This is the
social price of government-protected enterprise. The more leveraged
it is, the more profitable for those at the top, who make the decisions.
SILENCE OF THE LAMBS
who trust the mainstream media the way Enron’s employees trusted
Kenneth Lay find out that their trust was misplaced. But during
the mania faze, they will not listen.
If I had been
an owner of Countrywide stock in January, 2006, when the CEO made
the prediction the real estate market, I would have sold. The stock
was at $35. Then it rose to $45 by January, 2007. My sale a year
earlier would have looked like a very stupid sale. It would have
saved me from a loss of 75% of my investment as of January, 2008.
did not sell. After all, their
man was still at the helm. He was not bailing out. But why should
he? He was paid almost $142 million in 2006.
do not pay attention to the fundamentals of economics, they will
lose. The fundamentals of economics say that bad performance will
be penalized in a free market. But when the government intervenes
in order to thwart the operations of a free market, bad performance
is not penalized in the protected sectors of the economy.
At that point,
investors lose. They lose big. They pay the freight. They suffer
the losses that should be suffered by the decision-makers at the
top. They cannot safely defer responsibility to those at the top.
They must watch what the government and its licensed agents are
doing to extend the boom. They had better understand that central-bank
orchestrated booms eventually turn into market-imposed busts. The
lambs are too trusting. This includes the salaried lambs in the
mainstream media, who can barely afford to buy a home today. The
media lambs are not merely silent; they are vocal surrogates for
the system that has created the leverage that is now beginning to
good in 2006 — Countrywide’s stock price — began to look
less good after February 1, 2007. Today, it looks like a basket
case. The investors have lost most of their investment. Yet they
Yet they had
been warned by the CEO. He had spotted the end of the real estate
boom in early 2006 and went public with his opinion. Almost no one
listened. Doug French did. I listened to French. I posted a link
on my site to his article the next day.
media did not sound an alarm on this ongoing international crisis.
This week, Great Britain’s fifth largest bank went bust. Northern
Rock was nationalized on Sunday, February 17. What brought it down?
America’s subprime loans.
on a Sunday indicates just how scared the regulators are. Bureaucrats
do not work on Sunday unless it’s a national emergency.
is not saying, “This is the first major banking domino to fall.
There will be more.” The event is being treated as if it were an
anomaly. It isn’t.
mainstream media will not sound an alarm. That is why people who
do not trust the mainstream media read obscure newsletters and visit
obscure web sites.
A word to
the wise is sufficient.