Scott Grannis provides some excellent structural analysis of current wall of worry

Retired economist Scott Grannis published a noteworthy post yesterday on his Calafia Beach Pundit blog. We believe all investors should tune in to his blog for all his analysis, but yesterday's post, entitled "Rosenberg's Six Walls of Worry," is especially noteworthy for his clear and insightful discussion of six concerns voiced by economist David Rosenberg.

There's an old saying on Wall Street that the market "climbs a wall of worry" -- in other words, that market gains are actually sustained by concerns and worries (often global political or economic concerns). This saying has some merit, in that these concerns can act to keep money on the sidelines which comes in later on when the feared outcomes do not materialize, driving the market higher and sustaining the upward progress. (Note that we have cautioned investors about ascribing too much value to Wall Street truisms in past blog posts, such as this one and this one).

In the above article, Scott Grannis responds to six "major things that the bulls aren't appreciating" according to Rosenberg, as reported in this Business Insider article by Joe Weisenthal.

What's particularly noteworthy about the Calafia Beach Pundit's analysis of the former Merrill Lynch economist's arguments is the way in which it highlights the distinction between a supply-side approach to economics (from Scott Grannis of Calafia Beach) and a demand-side approach (from David Rosenberg of Gluskin Sheff, formerly of Merrill Lynch).

We believe this is a very important distinction for all investors to understand, and we have written about it in many previous posts, such as this one from two years ago. It can also be described as a distinction between production (the supply-side) and consumption (the demand-side), and an obsessive focus on "The Consumer" is usually a dead giveaway that you are dealing with an adherent of the demand-side / consumption-driven approach to economics. These two schools of thought are so diametrically opposed that economists from the two different camps will typically interpret one event or possibility in entirely opposite ways.

Note, for example, how Scott Grannis deals with David Rosenberg's worry number #3, that a newly-elected GOP Congress might enact spending cuts, which Rosenberg believes would hurt the economy and slow down GDP growth because of the decrease in government stimulus. Mr. Grannis writes, "It is amazing to me that so many economists and commentators automatically accept the proposition that a cutback in federal, state, and local budgets will hurt the economy.
[ . . .] Indeed, there are good reasons to believe the stimulus spending probably hurt the economy, since it a) drained significant resources from the more efficient private sector, b) spent those resources wastefully and inefficiently, and c) created real fears of a surge in future tax burdens, thus discouraging private sector investment."

Similarly, he deals with Rosenberg's worry over rising oil prices by focusing more on the production side of the economy (factories, projects, and investments) than the consumption side of the economy (as Rosenberg does, stating that as gasoline prices rise, we should "expect the consumer to sputter").

We're not saying that investors should not keep their eyes open at all times to the global macro economic and political situation -- on the contrary, we devote a large amount of time each day to such analysis. However, the approach to economics that one brings to such analysis is extremely important, and we believe that the recent post by Scott Grannis (with whose approach we generally agree) highlights the contrast between the two major approaches in a very helpful way for investors.

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