Agora Financial’s Rude Awakening

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London, England

• Mounting market misery as stocks slip back into the red,
• “Dude, where’s my stimulus package?” and other unsolved mysteries,
• How number crunchers wind up becoming war criminals and more…

Joel Bowman, reporting from Bali, Indonesia…

Since the country celebrated its 233^rd birthday, Wall Street’s major indexes have each shed over 4%. Jobs are drying up faster than old that old apple pie in the back of the fridge and housing prices are still falling. Foreclosures notices are landing in more and more American’s laps.

In this time of increasing peril, American’s look to their “Chief of Chiefs.” And so, Obama spoke to his huddled masses (from the safety of Ghana) over the weekend. The stimulus package, he told them, “has worked as intended.”

“We’re moving in the right direction,” the big kahuna said. “We must let it work the way it’s supposed to…”

The plan, he continued, perhaps anticipating some antsy rebuttals from across the aisle, “was not designed to work in four months – it was designed to work over two years.”

How did we let this thing pass, Obamas subjects must be starting to wonder. And can we stand it for another twenty months? Americans will remember being strong-armed into a corner, lied to and forced into a situation they didn’t understand.

“Joe Biden told us unemployment would reach 8% if we didn’t ‘act’,” says one discontent. (Official figure is now 9.5%. We “guessed wrong” offered Biden.)

“I was told my house could be saved…my stocks would rebound…my face would get prettier…,” they chorus.

“I was told the earth would hurtle into the sun if we didn’t ‘do something’,” says another. (It didn’t.)

Often times in life we are called on to do something, only to realize the correct something was really nothing at all. In the column that follows, Bill Bonner examines one such situation that turned a simple number cruncher into a war criminal. Please enjoy and send any and all emails to the address below…

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Bubble Deniers
By Bill Bonner

“War Criminal says Sorry, Sobs,” was the headline in the Nation on February 9th, 2004. Robert McNamara had just done something extraordinary for Secretaries of War: with tear in his eyes, he apologized for his role in the Vietnam War. The war made ghosts out of 58,000 American soldiers. On the Vietnamese side, the total was over a million. This week, McNamara went to meet them.

Why do smart people do such stupid things? The French had already shown what Western powers were up against in Indochina. De Gaulle had warned Kennedy that it was a “rotten” country. Still, the United States sent in troops…and McNamara, to his credit, spent the last 40 years of his life regretting it.

We do not disrespect the shades here on the back page. But once they are down, we can hardly wait for the autopsy report. We want to know what was wrong with them. McNamara had a brain “like a computer,” say the morticians. Too bad. He needed more than that.

Robert McNamara was described in the obituaries as the “architect” of the Vietnam War. This is libelous to real architects; as near as we could tell, the war went on without plans or blueprints. Instead, Robert McNamara took an economist’s approach to war. His formula had only three numbers: how much damage he could inflict on the enemy; at what price; and how much pain the Vietcong/North Vietnamese could stand. Later, he discovered that the enemy wasn’t even counting.

Long gone are the days when economists thought deeply about how life actually works. Adam Smith, Adam Ferguson, Anne-Robert Turgot – the great “moral philosophers” – all died hundreds of years ago. Since then, the trade has gone bad. They’re all numbers guys now. An economist, of the modern variety, is a statistician…an extrapolator…and a mountebank. If numbers go up two months in a row, he predicts they will go up another one. He rarely stops to ask whether his numbers really make any sense.

Instead, he merely adds them up and rolls them out. Thus – at the bubbly top in 2006 – he was he able to describe the likelihood of default on a certain derivative instrument as a “Six Sigma event” without laughing. A Six Sigma event happens once every 2,500,000 days. Then again, when the Bubble of 2002-2007 popped, they happened once a week.

The blogs are full of chatter on the subject. What good is the economics profession, asks Paul Samuelson, if it cannot foresee the biggest single economic event in at least a quarter-century?

Yet, those same economists – who had failed so miserably at diagnosis and prevention – they barely hesitated. Rather than spend months in drunken shame, contemplating their own incompetence, and wondering what a bubble really is, they denied the wild bubble side of life altogether…and tried their hands at prescription.

President Obama’s economics advisors went to Congress last autumn to predict that without the stimulus measure joblessness in the United States could rise to 8%! Bernanke made it seem that if the bill wasn’t passed that day, the economy may cease to exist all together. How he could know the future, when he demonstrably knew so little about the recent past, was a mystery. Still, the politicians responded by enacting the biggest bank bailout boondoggle in history.

What would have happened had the legislators failed to jump when economists threw them a bone? We don’t know. But we know what happened after the stimulus measures were passed – they failed to stimulate. The employment numbers for June showed that economists had misjudged both the direction and the speed of the oncoming bus. Instead of shifting down, the rate of job losses increased to 9.5% in the United States. Instead of going forward, the economy was backing up!

Do these setbacks cause economists to stop and wonder if their theories are bogus and their numbers are nonsense? Nope, they do what McNamara did. They turn up the heat. They propose to spend more money they don’t have on more programs that don’t work. Predictably, Obama advisor Laura Tyson now suggests that the stimulus thus far is “too small.” Other economists too are talking about a “son of stimulus,” that will offer even more credit to the debt-saturated consumer. Only trouble is, neither consumers, businesses nor banks cooperate. Despite trillions in cash and credit to the financial system, lending is still going down.

Robert McNamara was as smart as any of today’s number crunchers. A Harvard “whiz kid’ with a ‘can do’ attitude, he was one of the ‘brightest and the best,’ the kind of American that makes you proud to be one. He was an efficiency expert. But everything has its place. Poetry is not much in demand from bridge builders. In love, war and bubbles, on the other hand, rational efficiency is at best a second tier concern.

When asked to take the job at the Defense Department, McNamara replied to John Kennedy that he was “not qualified.” That was the last thing he was right about. As to everything else, he missed the point completely.

Sometimes it is the brain that fails. Sometimes, it is something else.

Joel’s Note: Our annual Agora Financial Investment Symposium in Vancouver, British Columbia is rapidly approaching…and this year marks the 10th anniversary of The Daily Reckoning. So, this July, the Symposium will be focused around a “Decade of Reckoning”…four days that will help you to gain greater insight on how to turn investment ideas into the profit opportunities of the next decade.

So, will we be seeing you there? This event is already 70% sold out, so you’ll want to be nimble. Click below for all the info: The Agora Financial Investment Symposium: July 21-24

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[Rude Endnote: Asian markets opened the week’s account in the dumps today. Japan’s Nikkei 225 and Hong Kong’s Hang Seng each dove 2.5%, while the Aussie All Ordinaries slipped 1.5%. That was enough to take the Hang Seng to a seven-week low.

European markets, however, were a bit more optimistic. London’s FTSE was up 0.6% last we checked while Germany’s DAX and France’s CAC were higher by 0.9 and 0.5% respectively.

Over in the commodity pits, crude seems content for the moment to sit just below the $60 per barrel mark. Gold’s performance too was rather underwhelming. The yellow metal fell below $910 on a stronger dollar before inching higher to about $912 as of a few moments ago.

We’ll be back with more Rude views tomorrow.

Until then…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com