Karl Denninger is a joke compared to James Grant
September 23, 2009
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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
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