Robert A. Weigand

Essay on Macroeconomics: Where Krugman Fails

Sounds like more of the same: Many words devoted to attacking Krugman and Keynes; few words devoted to proposing an alternative path to economic recovery. Are you implying that we should cut taxes and . . . then what? Your comparative intellecutal advantage is supposed to be providing insights into the connection between economics and politics. Reaganomics blew up because, even when Republicans controlled Congress, no one could get them to reduce of even slow federal spending. Thus the $14 trillion deficit. Now that the Dems are in charge (thanks to a huge anti-Bush turnout at the polls) . . . they're not going to cut spending, either -- tax cuts are therefore out of the question. That leaves Keynesian solutions. Lets just hope the fiscal stimulus works and we don't wind up stuck in a Japanese-style liquidity trap, or slow-growth stagflation scenario. Additionally, the reaction from European and Asian financial markets today was telling. Their governments announced continuation of the stimulus programs and stocks rose on the news. So the market obviously likes stimuli.

5 Dividend Stocks for Those that Missed the Rally

I would enjoy an explanation of how indicators like an average market P/E based on 1-year earnings of 53 and P/E based on 10-year average earnings (the Graham & Dodd and/or Shiller P/E) of 20+ imply a "fairly valued" stock market. Please provide your readers with greater specifics, because to fundamentalist, it's 2003 all over again -- the start of another "faux" bull market beginning from super-high P/E ratios, where it will take years for the average market P/E ratio to compress back to average, and immediately thereafter half a decade worth of gains will be erased in the blink of an eye. Enlighten us, please.

Sentiment Driving Prices Higher: Bull Is in Full Stampede Mode

Hi David: I think that's an excellent question. Honestly, I hadn't thought of a specific answer until you prompted me to do so. Technically, there is no widely-accepted way to measure the legitimacy of a bull market. To jump-start the dialogue, I would propose that a bull market is legitimate when buy-and-hold investors earn real stock returns that exceed the real return on bonds. The Mar-09 low of approximately Dow 6,500 took us back to 1996 levels (nominally), indicating a tremendous loss of real wealth for equity investors. When investors are better off in bonds for more than a decade, I'd say that's a "faux" bull. Rob Arnott's paper in the Journal of Indexes discusses this in depth; it's a great read (the link is long, hopefully it will reproduce): www.indexuniverse.com/....

On Aug 05 08:39 AM David Van Knapp wrote:

With all respect, by what definition is a 5-year, 101% increase in
the SandP 500 a "bull market that wasn't"? Please be specific: How long, or by how much, does a market have to rise in order for it to be considered a bull market? Does it have to last 10+, or 14, or 16 years, or "a generation"? I'd really like to know.

Sentiment Driving Prices Higher: Bull Is in Full Stampede Mode

Nice article, right to the point. If the first and second factors are weak (economic growth and valuations relative to earnings, respectively), stocks are rising solely on the basis of the third factor (emotion, a.k.a. Kenysian Animal Spirits). As the economy matures into an extended period of de-leveraging and subdued consumerism, what will drive the future growth in revenues and earnings necessary to support the P/E expansion documented by the author? At best, stocks appear priced for average to below-average returns in a period of unusually high risk. Historically, coming off of market bottoms such as Mar-09, relative valuations were much lower (as in Aug-82). Low relative valuations, disinflation and lower marginal tax rates drove the bull market 1982-1999. None of those factors appear to be in place now, so we may just be setting up a repeat of the heartbreaking high-P/E bull-market-that-wasn't of 2003-07. As the old sergeant on Hill St. Blues used to say, "Let's be careful out there."

No One Saw This Economic Crisis Coming?

For the record, I attended a talk given by UCLA's Ed Leamer (www.anderson.ucla.edu/.../) in Spring 2007, and Professor Leamer laid out the impending economic crisis on a silver platter to an audience of approximately 200 top money managers. Ed explained why macroeconomic conditions were unsustainable, and how the unwinding would proceed. He really nailed it. Ed is the director of the UCLA Anderson Forecast. You might want to bookmark the link, it's updated regularly and has been accurate for quite a while (uclaforecast.com/). In my opinion, it's a good "smart money" resource.

Why Economic Dogma Threatens Our Future Prosperity

Thanks, UK Farmer. Agree completely re: sustainability. Here's a decent collection of resources I keep on my main website if you want to explore further. I highly recommend the first book, "Plan C." It lays out the impending end of fossil fuel capitalism in clear terms.
www.washburn.edu/facul...


On Jul 11 05:19 PM UK farmer wrote:

> An interesting article..In America you have an aristocracy, a few
> people holding all the power, which is not much of a democracy to
> the rest of us.
> There is a book called "The Third Wave" by Alvin Toffler, which may
> ease the way forward, and is a more interesting book than The Downwave
> by Robert Beckman, that predicted this crisis, aping as it does the
> last 300 years of mans' finance.
> We certainly have to change the way we organise our affairs, and
> the conundrum is -can it be done without (your) bloodshed.?
> Your surviving genes need you all to use your undoubted collective
> intellects in SA to support a program for a sustainable future, in
> this time of denial.
> Just a macro view from one who knows little

Why Economic Dogma Threatens Our Future Prosperity

"We owe the government all of our wealth . . . " I don't believe those words, or any combination of words that could be construed to have that meaning, appear anywhere in the article. But, thank you for illustrating an extreme form of cognitive consonance. Your mind read what I wrote and overwrote it with what you think.

On Jul 11 03:55 PM CLH wrote:

> What complete garbage this article is. We owe th govt. all of our
> wealth? We have a party and president who believe this.

Why Economic Dogma Threatens Our Future Prosperity

And stock returns and corporate profitability were strong for decades afterwards!


On Jul 11 08:19 AM Sunnsea wrote:

> Roosevelt raised taxes on the rich to 90% to help pay for WWII.<br/>

Why Economic Dogma Threatens Our Future Prosperity

Regarding my insight into market P/E ratios:
www.iijournals.com/doi...

www.iijournals.com/doi...

On Jul 10 09:14 PM THofler wrote:

> The author clearly doesn't have a good understanding of reasonable
> P/E ratios in this environment. As Doug Kass (SeaBreeze Partners)
> said when he called the bottom on March 5, "you don't invest for
> the future in a severe recession by looking at trough earnings."
> We're in the trough. We won't be here for a very long time.
>
> Of course, you can make the point that "this time it is different,...
> really!" I know things are scary, especially with a new socialist
> government, but the U.S economy will recover.
>
> Second point: Pros like Ben Graham or Robert Shiller don't take
> trailing 12 month earnings very seriously. They look at earnings
> averaged over the last 3 years or as long as 10 years.
>
> Third point: Everyone gets exercised (congnitive dissonance!) over
> the the current P/E ratio of the S&amp;P 500. If you read some recent
> postings at the S&amp;P web site, they evaluate those earnings in
> exactly the same way they would for a single corporation with 500
> divisions. This is complete nonsense. The SPY or IVV is a portfolio
> of 500 companies, NOT a single corp. with 500 divs.
>
> The gigantic losses of AIG included in the S&amp;P500 has had a huge
> downdraft on those aggregate earnings, &amp; the stock should be
> valued near zero. But that does NOT have a huge effect on a well
> diversified portfolio.
>
> This article is a bunch of misleading data tarted up with a lot of
> babble &amp; liberal cognitive consonance.

Why Economic Dogma Threatens Our Future Prosperity

Thanks for your thoughts, ERCaptain, I appreciate your skepticism, and offer proof by counterexample. Here's what 3 credit hours buys you in my Applied Portfolio Management program: www.washburn/edu/sobu/apm. On the "Stock Reports" tab, bear in mind that those stock research reports are written by novice 22-year old undergraduates. Read one or two as time allows and get back to me on the level of quality you see. Make particular note of their spreadsheet modeling and valuation skills. Good news -- I've still got a few spots available in the Fall 2009 class. And I agree that we'd like each other in person. But I'm not going to give up on getting you to like me in writing, either.

Regarding Reagan, the point is that in his role as the Great Communicator, he pioneered the use of outrageous dogma (ketchup is a vegetable, tax cuts pay for themselves) that many have now seized upon and bombard us with constantly. Regarding Roosevelt, he put the Kenyesian strategy into play appropriately -- to spark an economy out of depression. Reagan, Bush Sr., Clinton and Bush Jr. all had the chance to make it right by paying down the deficits, or dramatically cutting spending, during times of prosperity. They can always veto those budgets, you know. But, as one of the astute commenters above observed, "we've played kick the can with values for so long now" that we just accept our daily dose of dogma as if it's our just punishment. Breaking this cycle begins with demanding a more engaging, dignified dialogue.

On Jul 10 05:24 PM ERCaptain wrote:

> A little humility in the approach would make this article more digestible.
> I suspect I would like Professor Weigand in real life, but this article
> was too much.
>
> I guess if we disagree with any of his points we are suffering from
> cognitive dissonance. Brilliant! Thus the article and professor
> are beyond critique.
>
> Where do we begin? Macro assumptions? His read on market sentiment?
> Health care? His assertion that CNBS and Fox have "carefully-scripted
> narrative" (there must be a plethora co-conspiratorial analysts coming
> on those shows)?
>
> The professor puts himself in opposition to the recently released
> paper of the San Francisco reserve regarding the value of tax cuts.
>
>
> As long as we are going after Keynesian, why not go back to Roosevelt?
> "Ronald Reagan is the inventor of borrow-and-spend government."
> Really? I thought Roosevelt gave us a primer.
> I have found it interesting that there has been very little recent
> main stream criticism of Obama's modern application of keynesian
> economics, while Reagan took a beating a la "Voodoo Economics".
>
>
> One would imagine that Professor Weigand would have more followers
> after this insightful post. Imagine a professor still taking an
> opportunity to poke at Reagan. Isn't it innovative thought? (Like
> Rob I am being rhetorical!) I am not sure I would want to pay the
> good professor for credit hours sprinkled with that level of insight.

Why Economic Dogma Threatens Our Future Prosperity

I appreciate your participation, but as with other commenters, I must point out that I'm just using the Reagan tax-cuts-pay-for-thems... dogma to illustrate how we'll latch onto something we know really can't be true, but we want to believe it so bad we start using this mis-processed information as a basis for further (irrational) thinking. If I were ever going to write a proper column criticizing Reagan, I'd have to include how David Stockman was villified for pointing out that Reagan was gutting Social Security (with the help of Greenspan) to make the budget deficits look smaller than they really were, and that the real motive behind that move was to please the Forbes/Goldwater crowd, who's always hated entitlement spending. After all, they've got theirs, what do they care about the "average people" who clean their houses, cut their lawns, and cook and serve their dinners in restaurants? You know -- our neighbors and fellow citizens.


On Jul 10 02:41 PM rosey99 wrote:

> Ballsy play to criticize Saint Ronald here on SA, though the bulk
> of the comments reflect our collective, and deep, denial.
>
> For those of you who still don't get it: It was grossly irresponsible
> to cut taxes, mostly for the very wealthy, while increasing spending.
> Accepting the tax cuts without requisite spending cuts was immoral.
> Combined with trickle-down - or voodoo - economics it was grossly
> immoral.
>
> The intellectual gymnastics one has to go through to rationalize
> tax-cut and spend behavior is frightening to behold. It speaks volumes
> about who we are, and the thinness of our moral fabric. This mess
> is now so huge, I don't know that those of us tasked with cleaning
> it up will be able to do it in a single generation. The budgetary
> wars to come will not allow for college deferments, though running
> off to Canada may remain an option. We're all gonna get drafted,
> and that pisses me off.

Why Economic Dogma Threatens Our Future Prosperity

I like it, thanks for participating.


On Jul 10 02:33 PM Leftfield wrote:

> Looks to me that until the government and oligopoly own absolutely
> everything and stamp out even these discussions and elections, we
> still have a chance and a responsibility.
> Voters are to blame for this ultimately. Reagan's deal with the Democrats
> was supposed to include spending cuts that never materialized. Really,
> the whole country has played "kick the can" for so long without values
> that we are at this pathetic pass where big government and Wall St.,
> as crony winners at this game, seem set to own us completely. <br/>A
> household cannot turn to another party (the taxpayers) generally
> like government to grab even more for there, can we agree on this,
> monumental, profligate waste. Similarly, the government will run
> out of even that option, although Jeff Nielson is absolutely right
> that the superrich need to be taxed far more.
> We are running out of time as those people have no principles other
> than that they are rich and thus, better than you and I. Bankster
> bailouts prove this. Vote early and often to exorcise us of the incumbents.

Why Economic Dogma Threatens Our Future Prosperity

I remain flattered that so many high-performance members of the SA community have commented on my article. I respectfully suggest that it's you who are missing the point. The example of tax cuts, the get-government-out-of-... fervor, and the national health care is too expensive argument are merely used as illustrations of cognitive dissonance and consonance. Like many other commenters, you have also taken the bait, overweighted one of your trigger topics (in this case taxes), and read the rest of the article as if it were blaming tax cuts for ills besides our crushing deficits. That's not what I wrote, read it again -- maybe with a blood-pressure cuff on when you get to the stuff you have dissonance towards. The point is that in swallowing the tax-cuts-pay-for-thems... B.S., and that we could have a bull market starting from a trailing P/E of 30 (in 2003), and that leverage could increase to the point that we allowed it in 2007, we were all mis-weighting information -- a serious cognitive flaw that we should be more on the alert for in the current environment. Which is why the Buffet-Gross-Grantham-... assessments are not receiving the weight they deserve right now. Ask yourself: if earnings fall 35% and grow slowly from their new lows, what level on the Dow and S&P imply 7% real returns over the long run going forward? The answer is scary . . .


On Jul 10 02:17 PM whidbey wrote:

> I think you have missed the point completely. The level of spending,
> not tax cuts, is the issue here. Tax cuts is a means of dis saving
> for individuals as a nation, but it attractives because our spending
> habits drive us to distortions and delusions about our needs to live
> happily an well. Taxes and RR are merely symptoms, not the disease
> itself.
>
> We as a nation expect that government has means and methods ordinary
> people can not possess, and can provide vastly more than tax revenues
> we want to pay . It is federal debt powers that are ruining us. The
> lack of moral character in Congress helps.
>
>
> We elect those who will spend to fulfill our wants, and needs. This
> is the fundamental dilemma of a republican form of government: the
> few can tax the many into oblivion. We need a hard currency Congress
> can not deface, spending limits for Congress that start with debt
> service first and current operations later, and a life style suitable
> to our productivity. You also got there.
>
> The capitulation you are looking for is coming, but you will not
> like it even in Topeka.

Why Economic Dogma Threatens Our Future Prosperity

Elevate your level of reading up to my level of writing -- Reagan is not blamed for the tech bubble, loose lending standards, etc., it's our tendency to inaccurately weight information ("it's the greatest bull market of all time!") that reinforces what we want to believe -- what we wish to be true -- that's cited as the cause of the bubbles.


On Jul 10 11:05 AM CautiousInvestor wrote:

> "One of the longest-lived and most pernicious problems is one of
> the least discussed — or even recognized. For example, this problem
> is responsible for many Americans' longstanding (and misguided) obsession
> with cutting taxes, which is the primary reason the federal debt
> has been allowed to explode out of control (and California is on
> the brink of bankruptcy). This problem fueled the market’s overvaluation
> in the 1990s, culminating in the infamous tech bubble. It lent a
> significant tailwind to the crazy lending standards and housing bubble
> that propped up the bull-market-that-wasn’t from 2003-2007, and the
> problem is still with us today, preventing us from clearly evaluating
> conditions in the economy and financial markets — particularly how
> we arrived at our current state of affairs
>
> The data are in, folks — $14 trillion of debt and counting — the
> fictional Arthur Laffer “tax-cuts-pay-for-them... narrative has been
> proven false beyond a shadow of a doubt. California tried its own
> version of this with Proposition 13 and they are on the brink of
> bankruptcy.
>
> It’s not unthinkable that our federal government could be in similar
> straights soon. If a household cannot escape this basic common sense,
> then neither can a business or a government — you have to pay your
> bills as they come due. You either raise taxes or cut spending, but
> you have to live with a balanced budget every year. But once Reagan’s
> minions got us believing that a different alchemy existed, hundreds
> of politicians have reinforced that dogma in their hollow campaign
> promises to the point where about a hundred million Americans now
> accept something false as true."
> ______________________...
>
> This author is somewhat paradoxical, capable of attributing all of
> our fiscal ills, the tech bubble and the housing bubble to Reagan,
> which is utter rubbish, while also making informed observations about
> today's market and the likley future.
>
> Like cognition, budgets have two sides: the income side and the spending
> side. Had we been genuinely concerned about federal, state and local
> deficits we would have contained spending, something politicians
> are loathe to do. By nature, politicians are predisposed to spend
> in the mistaken belief that they can allocate resources better than
> either the market or the source of income.
>
> After we cut through the psycho babble, the author makes a couple
> of interesting observations about big business, healthcare and lobbyists.
> He fails to connect the dots, though, and does not state the obvious:
> were government less involved in micro managing various industries
> through complex rules, regulations and tax exemptions we would have,
> miracles of all miracles, fewer lobbyists. Intrusion of the government
> in business is a welcome mat for lobbyists.
>
> I also happen to agree with his outlook for the future and his assessment
> that we are constantly fed a diet of economic pablum by mainstream
> media because of inherent conflicts of interest owing to ownership
> and sponsorship issues. The most egregious example of this is CNBC
> which is owned by General Electric. Not only has GE received $billions
> of TARP funds but it also stands to benefit from development of infrastructure
> and alternative energy.
>

Why Economic Dogma Threatens Our Future Prosperity

Thanks for yours, and everyone's comments. The references to Reagan's brilliant misdirection regarding his borrow-and-spend policies are mainly used to illustrate how we are wired to under- and over-weight data that contradicts and reinforces our current beliefs, respectively. You act this out perfectly in your reply, which focuses on one of the articles rhetorical points, and not its main idea. You overweighted my "heresy" -- you perceived my article was pro-government and anti-Reagan because I thoughtfully illustrated that what Reagan did and what he said were often 180 degrees apart. Just like lobbyists from banking and finance and health care, just like CNBC, which serves its advertisers and not its viewers, etc. That's the main point of the article. Synthesize the views of Buffet, Grantham, El-Erian and Gross -- they know what they're talking about. We face a rough future, and the sooner we wake up to that fact and start working -- and talking -- like we're all on the same side, the sooner we can move forward. That's what the article is about.


On Jul 10 12:56 PM Socialism cannot compete! wrote:

> "For example, this problem is responsible for many Americans' longstanding
> (and misguided) obsession with cutting taxes, which is the primary
> reason the federal debt has been allowed to explode out of control..."
>
>
> Um...NO!!! Author is a Big Government ideologue, apparently! I quit
> reading after this patently false line. It has never been more clear
> that the problem is out of control SPENDING, not inadequate taxation!!
> The real problem causing ballooning federal debt is SOCIALIST ENTITLEMENT
> GOVERNMENT, and the seemingly unending growth of such into every
> facet of our lives and business!! It has resulted in a large non-productive
> class, and high penalties for the most productive. And yes, Mr. Wiegand,
> we DO have an obsession with cutting taxes in the U.S. -- because
> this nation was founded on a few basic principles, among them the
> notion of personal property rights! Our Founders thought confiscatory
> taxation to be anathema to Liberty. Alas that you and your ilk have
> strayed so far from their philosophy yet still believe yourselves
> free.