I was having a post-Departmental Colloquium dinner with a small group of colleagues from the Harvard Chemistry Department in the Spring of 2008 when the subject turned to the then-recent shudderings of the stock market – a topic which at the time was of greater concern than usual but about which none of us actually knew anything at all. One of my colleagues (in fact our host) was an elderly professor with wisps of white hair and mildly expressed yet utterly inflexible opinions—a legitimately brilliant scientist whose certainty, alas, seemed to extended beyond his expertise. He was, in my mind, a model of the reflexively liberal, raised-on-the-Gospel-of-Saint-Krugman scientist that abounds at Harvard and in academia in general. And, despite a recent drop in the Dow Jones Industrial Average on the order of 10%, the professor dismissed any serious worry, suggesting that the ups and downs of the market were just meaningless tides of funny money.
“Rob” I said (not his real name), “I am sympathetic about that. And I too get the feeling that all these billions of created and lost dollars don’t seem to actually make a difference in our lives. But the Wall Street people are sounding a little more frantic than usual these days. They’re talking as though this time it’s really going to matter.”
Of course, the Wall Street people, as it turns out, were quite right, as the market dropped another 20% over the course of a few days in June and then (just to show they weren’t kidding) another 20% or so over the ensuing half year—taking with it down the rabbit hole around $11 billion of Harvard’s endowment. And, just to be explicit, because Harvard ran a substantial portion of its operation on interest from the endowment, that meant that building and hiring freezes, salary cuts, early retirement, and various other features of austerity weighed heavily on the Ivory Tower for quite a while. These days, I understand that Harvard has gone back to burying their money in an environmentally friendly tin can in the back yard, which might be about the only place that it is going to be safe this year.
Because, in case you haven’t heard, there is a real battle royale developing today over all of our collective futures regarding the current (this time equities) bubble and featuring roughly the same cast of characters (some play Bulls, some play Bears, one Oscar nominee plays the Fed Chairman) that oversaw our last catastrophe.
Unfortunately I don’t seriously understand economics and the stock market any better than I did six years ago. But (invoking my droit de scienziato and relying on my Ricochetti audience to chime in with facts and perspectives as they always do) here is how I see the situation:
There is intense debate going on in the worlds of economics, politics, and finance as to whether we will, in 2015, experience the mother of all stock market crashes or whether, instead, we will float along ever higher on the happy cloud that has been making at least some people rich over the last few years (or whether, for a third possibility, we will just muddle along somewhere in the middle). Beyond the diatribes from the punditocracy, there is a mood – maybe it is idiosyncratic – but there’s the feeling that something dramatic is about to happen. I mean, a snowstorm hits and the local supermarket runs out of bread?! Are we all rehearsing for something here?
On the one hand, as the President proudly articulated last week, things are moving along just swell. The economy grew at a rate of 5% in the third quarter, the stock market has gone up a healthy 8% or so in the past year, oil prices have been cut in half and the unemployment rate has dropped to 5.6%. What could go wrong?
The political elite and particularly the left elite (like Paul Krugman) are whistling a happy tune and calling, if anything, for more fiscal stimulus because…hell, money is cheap!
The other contingent of smiley faces right now are the Wall Street grunts—the everyday stockbrokers who make their living on tapping the firehose from ma and pa’s 401ks and piping it into that sunshine machine just downtown from the Bowery. It is their job for the most part to sell equities because they live in the quaint world where the market actually has to go up in order for anyone to make any money.
These are the bulls who come off the assembly line. There are a lot of them. So even if they don’t speak with a whole lot of authority their collective bellow sways a lot of opinion. (They punch, as Obama says, above their weight).
It is an unfortunate feature of their job that these bulls (much like offensive lineman in the NFL) don’t get noticed unless something has gone wrong. You will note, for instance, that Drudge follows the major moves of the stock market. Check it out sometime to see if I am right, but I feel that every time the Dow Jones index drops, oh, 350 points in a day there is a top and center photo on Drudge of some 30-something broker, glasses in his mouth, a buddy leaning over his shoulder, watching a screen that is out of the picture with a glassy-eyed expression of cold horror—like they’re watching the approach of a tsunami from the beach. Have you seen that picture?
So even the Bulls seem to sense that something is, sooner or later, coming.
What about the Bears?
The Bears are rather an interesting lot. There are the everyday stock market analyst Bears running this or that Capital Fund. There are the Republican lawmaker Bears who are Bears by instinct. But most interesting to me is the culture of Uber-Bears (though I am sure they don’t think of themselves that way) who run websites like Zero Hedge (you can find links to their many brethren within) and whose motto on the masthead, (where you expect to see things like “all the news that’s fit to print”) is “On a long enough timeline the survival rate for everyone drops to zero.”
This little community is convinced that the end is nigh. I am not really sure just who they are (anyone out there know?) but they seem to be a kind of Austrian economics-inspired cadre of Wall Street whiz kids. They post articles about the Fed pumping (and China pumping and Draghi pumping) and other morality tales with titles like (just recently) “Lies and Deception in Ukraine’s Energy Sector,” and “Fired Before Hired: How Corporations Rigged the Job Market and Killed the American Dream.”
To say that the perspective is cynical does not convey the picture. Compared to them, Rasputin is as dark as the raincoat girl on the box of Morten’s Salt. And I would not say they are humorless. But the humor is definitely of the Dr. Strangelove variety (like Buck Turgidson: “if the pilot’s good, see, I mean, if he’s reeeally sharp….”).
In its way it makes for some refreshing reading.
But what do they say?
Well, there’s a good argument (intellectually, I mean) to be made, and they make it time and again, that we are, in fact, all cannon fodder and that the only sensible thing to do is to stock up on rice and shotgun shells and get to work on that shelter in the backyard. To wit:
- The 5% rise in GDP was built on consumer spending and most of that came from the increases in healthcare costs.
- The quantitative easing around the world has led to a massive build-up of useless production. It has led, for instance, to a massive overproduction not just of oil but of other commodities like steel whose prices have plummeted in the past few years.
- The Volatility Index (VIX) is not yet at historic highs, but it is rising and when it has risen in the past (prior to major economic collapses) it has risen fast. Oh, and, by the way, the VIX ended up 18.7% yesterday!
- Little tremors like that election in Greece that you heard about are pulling the curtain down on the powerbrokers in the EU and Germany and the whole euro fantasy that a common currency can exist across independent, absurdly profligate welfare states.
They make a compelling argument. For those of us who have read Michael Lewis’ “The Big Short” and refuse to give an inch in any cynicism “pie eating” contest, there’s the suspicion of gold in them there hills. The only problem with the Zero-Hedgers – and it’s the same problem that you get all the time with the Austrians – is that they can tell you what…but they can’t tell you when.