Blinders on Wall Street

Some of the “experts” on Wall Street remind me of another useless species, jazz critics. Some of these unproductive types spill much ink debating about whether this sounds like jazz or that doesn’t sound like jazz — it’s hard to find a more idiotic discussion. To paraphrase Miles Davis, once you can pigeonhole jazz and put it in a museum, jazz is dead.

Which brings me to the jazz critics’ distant cousins, Wall Street economists and analysts. I’m listening to Joe Balestrino (Federated Investors) and Marc Chandler (Brown Brothers Harriman) on Bloomberg and it’s amazing some of the stuff people like this are saying.

According to Balestrino, the problem in the financial markets is limited to the banks and brokers but hasn’t yet spilled into the main economy. According to Chandler, housing is only a small part of the US economy. Nevermind China and other countries decoupling from the woes emanating from the US housing market, people like Chandler are espousing that the US can decouple from its own housing market. And memo to Balestrino, if people were buying houses and paying off their mortgages, there would be no problems in the financial markets. These problems started on Main Street.

John Rutledge threw out an interesting idea last week on thestreet.com’s Real Story podcast. According to him, it will be extremely difficult to show an “official” recession in the statistics due to the transformation of the US economy from a manufacturing orientation to a service orientation. As manufacturing becomes a smaller component of economic output, it will be hard for GDP to swing into negative territory. As he was part of the Reagan administration that helped bring this transformation about, maybe he’s onto something.

As I see it, there are a few major flaws in these so-called “experts” and their reasoning. First, they keep comparing apples to oranges. The methods to calculate inflation, employment and a whole slew of economic statistics has changed over the last few decades, yet people keep comparing numbers from today against numbers in the 70′s as if they showed the same thing. They don’t. Check out John Williams’ site for more insight.

Secondly, academic economists love to do this thing where they adjust for one variable and hold all other variables constant. This is especially helpful in controlled studies or data sets where variables can be cleanly defined and isolated. The problem is that the real world is much messier than this. It’s not possible to hold all other variables constant in the real world — everything is connected eventually. The end result is that lots of gullible investors lose gobs of money in these 1-in-100,000-year events that seem to happen every 5 years or so.

I don’t care if you call it a recession, an economic slowdown, a rebalancing of global accounts, a growth recession, stagflation, etc. This fallout from the credit bubble will ultimately result in a reduced American standard of living. Don’t wait until these experts point it out to you in the rear-view mirror.

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