QuoteOriginally posted by: Traden4AlphaFirst, are the confidence boosters being used too early?I don't think so. First of all the Obama administration is playing down the speed of the recovery, and most of the talk about recovery is just the result of the manic-depressive news cycle. What was really important was not so much "creating optimism" than "stopping total and wild panic." If you had a situation in which people were just running for the exits and pulling money out of everything, then you can't do anything done. Remember that it wasn't that long ago, that people were thinking "so which major bank or country is going to self-destruct this weekend?"Quote My fear of this arises from the perpetual under-estimation of the crisis and from the strong political pressures to "do something because real people are hurting."The problem is that you get into this cycle where each estimate becomes seen as an overestimate. People predict a Dow of 7000, then people remember that that was an overestimate so people then predict a Dow of 6000, then people remember that was an overestimate, and people predict a Dow of 5000. If you can stabilize things to the point where people aren't creating a new estimate that is worse than the last, you've done a lot. Something that is odd is that people are now wildly happy about numbers that would have been seen as a disaster two years ago. Who would have thought that people would be jumping for joy if the Dow hit 9000.The situation we are in is one in which people are giddy about having lost a leg because it seems that they didn't lose all their limbs. It's very interesting human psychology. This may be a good thing since it means that whatever happens probably won't "feel" that bad because we've gotten use to it. It's likely that bonuses and salaries in 2011 will stink compared to 2005, but since we are comparing them to 2008 and 2009, it might feel good.QuotePutting a bandage on a wound before the wound is clean doesn't help the patient in the long-term.But stopping the bleeding does. We were in a situation not long ago, in which every day there was a new financial institution failing each day. Also, if a policy causes unacceptable levels of pain, it's not politically viable. One thing I find interesting is that economists often blame people for being people. It's this weird attitude that "my models of economic behavior would work fine if I didn't have to deal with people." That bit of human psychology that I mentioned means that people would rather have 5% losses each year for ten years rather than a 50% loss in one year. When confronted with people's preferences, it's odd that economists often just act as if people shouldn't behave that way.Quote Central bankers, politicians, and executives of public companies have strong incentives for the use of optimism to preserve the larger system even if that preservation comes at the expense of some individual investors.You say that as if it is a bad thing. I suppose whether it is or isn't depends on whether or not your are the individual investor that is getting picked on.QuoteBut as a portfolio manager, I want to navigate this crisis with a much more realistic view of short-term and long-term economic outcomes. Thus, I want to understand what does consumer spending look like if the refinancing cycle is broken or what do corporate profits look like if taxes increase to pay off government debt and pension liabilities? The preliminary answers to those questions aren't very optimistic.I think whether a number is optimistic or pessimistic depends on what your reference level is. Something that explains a lot about me is that my reference level is the Great Leap Forward and the Cultural Revolution, and I doubt anything you are seeing is that bad. One nice thing about having low standards for success is that you tend to be in a good mood.Also, I don't think you can understand consumer or corporate spending if you assume consumers or corporations are automatons. A lot will depend on the level of optimism.QuoteSo what should a fund manager do?Your job is to manage funds, you aren't the President, the Secretary of the Treasury, or the head of the Federal Reserve. If your actions have the effect of contracting the economy, then it's the job of the Fed to pump enough liquidity into the economy to counteract that affect. Even if you wanted to help with the recovery, I don't think your individual actions are going to make much difference.QuoteBut if everyone turns their backs on equities, I don't see how the U.S. economy is going to create all the jobs lost in the downturn or create the exports needed to rebalance U.S. trade.I do. If this sort of thing happens, then it's likely that the United States government will become the investor of last resort and pump money into the stock markets, perhaps using the social security trust fund. Alternatively, you could have a situation in which the Fed buys portfolios of stock, perhaps from state pension funds, and exchanges it for cash. It's not a huge distance from what the Fed has done already. There are also some very interesting things that the government could do with universities. Basically, universities right now can take federal grant money and then use this to start companies based on patents they develop from this research. If you run into the problem where you don't have anyone private that is willing to take the second step, then you could have the NSF or NiH take this role.This will create an economic system that is *wildly* different than anything that anyone could have imagined in 2007, but it's actually not that far from what the government has done thus far, and if it's a choice between a stagnant economy and rethinking the role of government, then people will rethink the role of government. The US has a lot of resistance to state ownership, but resistance to state ownership is much less in other countries, and if China or France tries something like it, and it works, the US will follow along.I think we are moving out of the "crisis" phase, and into the much, more interesting "structural change" phase. Right now, I'll believe anything, but I think that if a time traveler from 2027 went back to 2007, and explained what the economy looked like, I think people would be shocked. Whatever system comes out of it, I think people will eventually go overboard, and things will crash and burn again in my lifetime. The good news is that I'm pretty optimistic about the future of Wall Street. You have a bunch of smart and motivated people that will figure out how to get ahead in the new system whatever that system may look like. If it turns out that people decide that Soviet-style central planning is the way to go, then you'll see pictures of Karl Marx and Lenin pop up on Wall Street. If the public goes into "shoot the bankers" and all the bankers and banks will suddenly disappear, but you'll have people called "resource allocation specialists".
Last edited by twofish
on May 14th, 2009, 10:00 pm, edited 1 time in total.