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Karl Denninger is a joke compared to James Grant

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September 23, 2009 – Comments (8)

The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born not an infant, but a giant.

- English economist Arthur C. Pigou

I know that this will be heresy in the world of CAPS, where bears roam wild and people like Karl Denninger are worshiped, but those two bloggers (and despite the fact that I enjoy blogging it's not exactly at the top of the pyramid in terms of success in life) can't hold a candle in terms of their resume to Jim Grant.

Immediately before the "Great Recession" as many are calling it now, Denninger was saying things like this in his blog:

Economy BOOMING! Sorry, No Crash For You Shorts!

There is new data out today showing that home prices are rebounding - up 6% in every market in the nation. 20 tranches of mortgage debt were priced today above par - the lenders are cheering - and their stock prices look to be go to the moon tomorrow morning.

This is going to hurt bigtime - I've got a lot of short positions, and they'll all be underwater. Maybe the quick covers I've placed for the market tomorrow will save me - if not, I'm sure I can find a refrigerator box somewhere to live in...

DOW 20,000! Nasdaq 10,000! S&P 2500! The new BULL RUN starts tomorrow morning!

See 'yall on my new Yacht!

At the same time, Jim Grant was warning others about the massive problems that the economy was about to run into.  He called the recession and now he's calling for a recovery. 

Whose opinion on where the economy is headed should we believe, a well-respected, author and economist with a proven track record that goes all the way back to 1983 who gets paid for his opinion OR a blogger with a short, spotty track record of predicting what will happen and no real background in economics.  I'll let you decide.  Author's note...I love that Grant's newsletter touts itself as "Without bragging, we like to think that we are the financial-information medium that least resembles CNBC." HA.

Denninger does make some good points from time to time, but in terms of where the economy is headed I'm going to side with Jim Grant myself.  This brings me to the Op-Ed piece that he wrote recently for the Wall street Journal, From Bear to Bull.  It is a very optimistic piece that talks about how we are in the midst of a massive, rapid economic recovery.  I wouldn't personally go that far, but Mr. Grand makes some good points...particularly when he compares our current situation with what happened during the disaster that was the Great Depression:

At the business trough in 1933, the unemployment rate stood at 25% (if there had been a 'U6' version of labor underutilization then, it likely would have been about 44% vs. 16.8% today. . . ). At the same time, the consumption share of GDP was above 80% in 1933 and the household savings rate was negative. Yet, in the four years that followed, the economy expanded at a 9.5% annual average rate while the unemployment rate dropped 10.6 percentage points. Not even this mighty leap restored the 27% of 1929 GNP that the Depression had devoured. But the economy's lurch to the upside in the politically inhospitable mid-1930s should serve to blunt the force of the line of argument that the 2009-10 recovery is doomed because private enterprise is no longer practiced in the 50 states.

Grant's contention is that the economy eventually recovered from the Great Depression and things are no where near as bad today as they were back then and the government's response was much more timely and aggressive this time around (a combined monetary and fiscal stimulus of an estimated 19.5% of GDP which dwarfs the average combined stimulus of 2.9% for post WWII recessions) that a recovery is inevitable. 

Here's an excellent quote from the article on how the Federal Reserve's current policy is impacting the economy.

The Fed may be worried about something else. By sitting on interest rates, it is distorting every business and investment decision. If mispriced debt was the root cause of the narrowly-averted destruction of global finance, the Fed is well on its way to setting the stage for some distant (let us hope) Act II. In the meantime, ultra-low interest rates have lit a fire under the stock and debt markets.

By rallying, equities and corporate bonds not only anticipate recovery, but they also help to bring it to fruition. By opening their arms wide to such previously unfinanceable businesses as AMR Corp., parent of American Airlines, and Delta Air Lines Inc., the newly confident credit markets are implementing their own stimulus program. "Reflexivity" is the three-dollar word coined by the speculator George Soros to describe the dual effect of market oscillations. Not only does the rise and fall of the averages reflect economic reality, but it also changes it. One year ago, the Wall Street liquidation stopped world commerce in its tracks. Today's bull markets are helping to revive it.

There's no doubt that our nation faces tremendous challenges that we will have to deal with in the years to come, including an aging population and a high level of debt.  Denninger touches upon a number of these in his posts and speeches, but keep in mind that Denninger has a motive.  His blog was originally centered around politics.  It is in his best interest to make people believe the economy is as terrible as possible to win them over to his side of the political game.

I personally am not as optimistic that the recovery will be nearly as "V" shaped as Mr. Grant is.  However, I a much more optimistic than the perma-bers out there like Denninger and Mish.  As a result, I have positioned my portfolio to benefit if stocks increase, but to pay me...in the form of high dividends and interest... if economic growth is not robust going forward.

Well, that's all the time that I have for now, but I'm sure that this post should spark and interesting debate.  I'll check back later.  Talk to you then. 

Deej

8 Comments – Post Your Own

#1) On September 23, 2009 at 11:05 AM, russiangambit (29.31) wrote:

Well, I saw a clip with James Grant about 2 months ago and I was quite impressed with him. He was a bear then, talking about bad fudamentals, unsustainable debt in such. And then suddenly he turns aroun180 degrees and tells us there is going to be a recovery on technical basis, because when you fall so far the receovery is usually very sharp.

However, I would like to hear how he arrived to this bullish position of 2 months ago to this bullish position of today, other than looking at statistics and technicals and being tired of waiting for the market to correct? To me it looks more like he gave up and tries to explain his position but not very successfully. I gave up to, but at least I know exactly what my reasons are. As for his reasons, we still have no idea.

 

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#2) On September 23, 2009 at 11:16 AM, davejh23 (< 20) wrote:

This is exactly what scares me about the government's response:

"Grant's contention is that the economy eventually recovered from the Great Depression and things are no where near as bad today as they were back then and the government's response was much more timely and aggressive this time around (a combined monetary and fiscal stimulus of an estimated 19.5% of GDP which dwarfs the average combined stimulus of 2.9% for post WWII recessions) that a recovery is inevitable."

We don't have a $14 trillion economy.  How long will it take consumer spending to increase enough to plug the hole that's been filled by deficit spending?  It could take years, and to avoid the appearance of a "depression", the gov't could double the national debt in a few short years.  If gov't balances the budget, we have an instant depression.  If gov't keeps spending to make it look like we have a $14 trillion GDP, we double the national debt...but the Fed will quickly become the only buyer of long-term treasuries. 

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#3) On September 23, 2009 at 11:37 AM, alstry (35.87) wrote:

The only reason things are so much better today is that in the 30s...government ran a balanced budget.  If government was forced to balance the budget....either by choice or destruction of the value of the dollar.....100,000,000 million Americans dependent and spending $2 trillion dollars per year would be forced to stop immediately.

Imagine the impact of a balanced budget on our economy while tax receipts are evaporating.  We are screwed either way, if we keep spending, our money is worthless and we are all broke since we are consumption based with few exports, if we start saving and stop spending, our economy contracts massively.

Right now we are doing both setting the stage for an inflationary depression....and in a leveraged consumer based economy where wages are constrained....the results will be devastating.

Hawaii Teachers Agree to 17 Furlough Days -  7.9% Pay Cut

You can only cut pay and fire workers for so long before there is nothing left to cut and few left to fire and cash flow to families, business and government evaporates.

And right now we are cutting and slashing like never before...especially with government and health care.

Mayor of Anchorage Expects Major Layoffs Next Year

Waupaca County - No Layoffs but 480 Workers get Furlough

City of Baltimore Plans 27 Layoffs

BF Goodrich - 350

Pinellas County - Possible Hundreds of Job Cuts

Pierce County Washington - Proposed 285 Job Cuts

Update: Genie Industries - 400

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#4) On September 23, 2009 at 1:23 PM, leohaas (33.49) wrote:

"The only reason things are so much better today is that in the 30s...government ran a balanced budget."

This observation is very much at the core of the current recovery (notice: no quotation marks here) as compared to what happened following the 1929 crash. It acknowledges that the current Keynesian policies are working, and that a balanced budget (or gold standard)  would have led to a repeat of the Great Depression!

Thank you alstry for pointing out these facts. Going forward, it remains to be seen if the stimulus indeed jump started the economy, or that the economy will fall back into recession or even worse. We can discuss that here at length, but that is a matter of opinion...

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#5) On September 23, 2009 at 2:32 PM, alstry (35.87) wrote:

leo,

Now the only thing to be seen is if we continue with the same policies will the dollar be worthless creating a situation much worse than The Great Depression.

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#6) On September 23, 2009 at 4:09 PM, Cinquero (31.42) wrote:

As a matter of fact, I would not talk of a balanced budget in 1930. Rather, there was almost NO BUDGET AT ALL! They cut taxes in half or so... and they ended up paying 10-20 US$ *PER YEAR*!!!!

Learn this: the social welfare state is the anti-cyclic policy tool we use today.

However, since margin speculation has retraced to a normal level and most probably won't advance the next 3 years or so, and since Mutual Funds are all in now, I just see no upwards pressure in the US markets now. The fundamentals will erode them constantly over the next years, I guess.

And refinancing the previously bankrupt corporations... well... what sense does that make? To extend the agony and prevent a reduction of overcapacity for another few years? Sounds pretty deflationary to me.

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#7) On September 23, 2009 at 4:33 PM, WeenTang (54.79) wrote:

Here's what I find ingteresting...

At the business trough in 1933, the unemployment rate stood at 25% (if there had been a 'U6' version of labor underutilization then, it likely would have been about 44% vs. 16.8% today. . . ). At the same time, the consumption share of GDP was above 80% in 1933 and the household savings rate was negative. Yet, in the four years that followed, the economy expanded at a 9.5% annual average rate while the unemployment rate dropped 10.6 percentage points.

Grant is talking about the trough in 1933, 4 years after the crash in 1929.  In other words, it took 4 years to find the bottom after the initial crash.  I have no doubt that at some point we will experience a substainable recovery.  I just think we have a long way to go before we find the true bottom.  All the government intervention is just pumping up the bubble

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#8) On September 24, 2009 at 9:51 AM, jesusfreakinco (28.93) wrote:

Alstry is right.  The alternative coming down our road is the USD will be worth much much less or may become worthless.

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=264660&t=01007614523203038290

JFC

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