jgonion

John Hussman: Applying Ockham's Razor to the Current Crisis

John,
It's true that we need to address the cause of the problem and not merely the symptoms. The cause of the problem is not people's fear of financial instability. This is a relatively recent phenomenon, caused by layoffs and bank failures. The problem has been caused by the bank's failure to lend, which was caused by the opaque debt structures on their balance sheets.

As you point out, you can't fix the financial system if you can't read a balance sheet. This is precisely the problem: Financial institutions can't read their balance sheets because of the opaque and questionable securities that are on them.

Yet, you object to removing the offending organ:

> an ill-considered idea to purchase distressed assets directly from
> financial institutions, the Treasury somewhat inadvertently
> discovered what we had strongly argued from the beginning –
> that providing capital directly to financial institutions was the
> most effective use of TARP funds.

OK, so the banks can borrow money from the Fed, but they *still* don't know what's on their balance sheets, and are therefore have incentive to use the money to increase shareholder equity against the big unknowns on their balance sheet, rather than lend the money.

The cause of the problem is that the banks have stopped lending, pulling vast amounts of money out of the economy. A review of the economic data clearly shows this process beginning back in 2006 (you can check the Fed's G20 data), long before there was any fear of financial instability.

You're right, we need to fix the cause of the problem. It's not foreclosures which, while huge from an individual perspective, are a drop in the bucket of the larger economy. As long as the banks can't evaluate their own balance sheets due to the opaque debt on them, they can't lend in a fiscally responsible manner.

I assure you that getting the bad debt off of the books of the banks is not ill-considered, but was in fact thought through very carefully. The problem is that it was unpopular to a broader (and largely uneducated in economic matters) public that doesn't want to help the people that got us into this mess. But that's just rhetoric. We still need to clear-up the balance sheets off the banks so that they can be properly valued and begin lending again.

Resumption of lending will inject far more capital into the economy than the government (read taxpayers) can do on their own.

There is an well-written primer on the subject at:

seekingalpha.com/artic...

John Hussman: Based on Okun's Law Obama's Stimulus Plan May Fall Short

With regard to Okun's rule of thumb, the key words are "is accompanied by", not "causes". This article appears to make the assumption that unemployment somehow *causes" a reduction in DGP: ("underestimates the economic impact of job losses").

On the contrary, unemployment is a lagging indicator of economic activity. Unemployment typically begins to rise *after* the economy slows, and usually continues to increase after the economy has turned around (Usually peaking 18 months *after* the bottom of economic activity.)

So rather than worrying about the "economic impact of unemployment", we should be worrying about the job losses that will be caused (18 months from now) by the downturn in economic activity.

ECRI: Economic Recovery Not on the Horizon

Reader Beware:

It's important not to read too much into the ERCI indexes for the purposes of investing. These so-called "leading" indexes do in fact lead the indexes that are believed to be "coincident" with changes in economic activity. However, the leading indexes typically lag stock market activity, making them of dubious predictive value for investment purposes.

Readers can explore this relationship by downloading the ERCI data from:

www.businesscycle.com/.../

... and comparing it to weekly S&P quotes from:

finance.yahoo.com/q/hp...

How Accurate Is the January Barometer?

January Myth Debunked:

Take a good hard look at the numbers presented in this piece. It is true that the January return correlated with the rest of the year 72.5% of the time 50/69 years (0% return in 1986 has no direction).

I propose another predictor of the market. It will always go up. Looking at the numbers above you will notice that this simple predictor is also correct 50/69 years (72.5% of the time).

From this, it should be clear that a positive return in January has zero predictive value.

Now, let's look at negative returns in January. These correctly predict the direction of the market 52% (13/25 down Januaries) of the time. I can't help but notice that flipping the Nickel in my pocket will achieve a similar prediction rate.

So, let's recap: A positive return in January tells you nothing, and a negative return in January tells you nothing.

Reader Beware...