The Blowhards And The Analysts

Image credit: Five Thirty-Eight

Over at Salon, former Secretary of Labor Robert Reich wrote an article in which he justifiably slammed the so-called financial analysts who have been making so much noise lately about how the measures that President Obama is proposing to keep the economy from worsening have already made America a socialist hell:

Is Obama responsible for the meltdown of the Dow? The consistently wrongheaded Wall Street Journal's editorial page says so, as does Republican Fox News, CNN's reliably demagogic Lou Dobbs, and now CNBC (where, full disclosure, I frequently appear as a token liberal). CNBC's Jim Cramer, who bloviates nightly about stock picks, says Obama is pushing a "radical agenda" that's destroying investors' wealth. My friend Larry Kudlow, who rants nightly about nearly everything, says Obama is destroying capitalism. CNBC reporter Rick Santelli's ballistic nonsense about Obama's mortgage plan made him a pop-populist icon for a week or so.

Is Obama Responsible for Wall Street's Meltdown?

The short answer to the question Reich poses in the article title is, no, he's not. At least, he's not yet. That should be obvious. Nothing Obama has done is so Earth-shatteringly new and different that the economy has simply crashed as a result. The economic slide we are in is a result of decisions made by the Bush Administration, and the previous three administrations. What he is doing is starting to have an effect, though.

How to measure that effect is another question, and Nate Silver has been thinking about this. On Thursday, he wrote an interesting article on the relationship between stock market prices and the health of the economy in general. While it tends to focus on what the underlying attitudes of investors might be, it's nonetheless interesting. Here's his introduction:

Looking at the performance of the stock market offers both promise and peril in providing insight into the future direction of the economy. The promise comes because the market, in a fundamental sense, ought to reflect anticipated future profits of a wide array of publicly-traded large and midsize businesses. All else being equal, these companies can be expected to earn more money in good times than in bad, and therefore economic expectations will be reflected in their share prices.

The peril comes because the market will also pick up a whole host of other things that aren't particularly relevant to the well-being of the economy as a whole.

What the Stock Market Really Thinks About the Economy

He lists several reasons why simply looking at the price of all stocks, or stock lists like the Standard and Poors (S & P), isn't a true indication of what investors are thinking about the economy, and how optimistic they might be about the immediate future.

He goes on to explain a new metric he's been comparing to the economy's performance. He calls it the Cyclical Expectations Index (CEI), which is a normalized ratio of the price of stocks that are tied to "staple" industries, agribusinesses and some retail, for instance, and "discretionary" industries, like cars and cruise lines. As you may recall, last year I wrote an article about losses that Starbuck's was experiencing, in which I theorized that this indicated tougher times ahead. Starbucks is an example of a discretionary business - people don't need to buy coffee at a shop. They can make it at home, or stop drinking it. Nate seems to be thinking along similar lines, but in a more thorough way. If investors are more willing to invest in discretionary industries, then they are implicitly more optimistic about the short term future of the economy.

The results of his analysis are interesting. They suggest yet another reason to assume that just looking at stock prices isn't all that much an indicator of the optimism investors have about the economy:

It appears that when the CEI dips below 100, this indicates recessionary expectations. The CEI fell below 100 on October 11, 2000, about five months in advance of the recession that began in March 2001 (it also briefly dipped below the 100 mark following the events of September 11th). The CEI also began falling significantly as of about August 2007, losing 25 percent of its value in the second half of that year in advance of the current recession, which dates back to December 2007 . In both cases, the CEI was much quicker to anticipate the recession than the broader S&P 500[.]

What the Stock Market Really Thinks About the Economy

Go check out the article for all the fine points. His conclusion is that the market is actually more optimistic than the prices alone would suggest.

Which brings us back to the blowhards Reich was taking to task. In addition to being unable to analyze the economic picture well enough to have anticipated our current situation, these guys are wrong for yet another reason. There are certainly people who did, including Paul Krugman, Nouriel Roubini, and, in a small way, Yours Truly. These clowns are also assuming that a stock market that has lost a considerable amount of value is pessimistic by definition. This assumption is yet another thing they're wrong about, as Nate Silver has helped make clear.

UPDATE: Robert Reich, not Robert Rubin, was the author of this piece. Thanks to selise, who noted the correction at FireDogLake.