by Gary North
Do a search on Google:
This article is typical: "Wall Street Gurus Say No Recession in 2008."
Now do a search for:
There are 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 is significant.
This month, the number of forecasts of a recession in 2008 is increasing, but it is nowhere near a majority status.
The financial 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?"
CONVENTIONAL WISDOM IS REWARDED
"Nobody ever got fired for recommending IBM." That familiar slogan has governed the computer industry since at least 1960.
"Nobody ever got fired for predicting 'no recession next year.'" That slogan has governed the forecasting industry ever since 1819, when America's first depression hit.
Safe forecasts 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 same.
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."
Predict good 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.
Advertisers 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 forecasts.
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.
Since the 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.
Cheers all around. The media can revert to "no recession next year." They got blindsided in 1982, when a second recession hit, but this is extremely rare.
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:
Q: 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?The NBER doesn't actually tell the media what criteria it uses to define a recession. Instead, it announces this:
A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them.
A 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.
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 self-prescribed glasses."
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.
BIG 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 his employees.
"People should feel like a part of an organization and reap its rewards," he said.
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 compensation.
Yes, reaping 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.
In March, 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:
Countrywide 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.
French went on to say that nobody in Las Vegas took this warning seriously.
Investors 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 ship.
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 win bigger.
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.
THE SILENCE OF THE LAMBS
Those investors 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.
But investors 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.
When investors 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 implode.
What looked 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 are silent.
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.
The mainstream 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.
This action on a Sunday indicates just how scared the regulators are. Bureaucrats do not work on Sunday unless it's a national emergency.
The press 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.
The 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.
Copyright © 2008 LewRockwell.com