Recent weaker-than-expected economic data sent the stock market into a six-day decline, particularly weak employment and manufacturing data. This is bringing back talk of a "double dip" recession, which has never been far from the headlines since the economic recovery began back in 2009 (see here and here for previous posts discussing the "double dip" fears).
Much of the recent economic discussion features this familiar argument: the government has been artificially propping up a broken economy, and now that the artificial stimulants are wearing off or losing their effectiveness, we are heading back down to the dark days of March 2009 and the bottom of the market, the depths of the recession, or even to a worse place than that.
This argument can be heard both from pundits who believe that government spending is good for the economy (generally, a Keynesian view, which we have discussed in previous posts such as this one and this one), as well as from pundits who believe that government spending is bad. The latter tend to think the economy was not ready to recover without those stimulants and such artificial "propping up" only served to delay a necessary "purging".
An example of the first group would be the author of this recent article from the Economist. In it, the author operates under the assumption that the government "swinging into action" is what saved the economy before, and that it is inexplicable that the Fed and the Congress are reluctant to stimulate it again since it appears to have crashed (the article features a graphic cartoon of an 18-wheeler truck -- labeled "Economy" -- crashing nose-first into the ground).
An example of the second group is Peter Schiff, CEO of brokerage firm EuroPacific Capital. He also thinks the "recovery" has been dependent on the government, but he thinks that intervention has been bad, because it has prevented the collapse of the institutions that led to the crisis in the first place. In this recent interview, he declares that:
Both of the above camps basically agree that the entire recovery has been the product of government engineering -- a sort of Frankentsein's monster re-animated by the government (playing the role of Gene Wilder). One side thinks that Dr. Frankenstein is a genius and that his constant supervision of the economy is a must, while the other side thinks he is a madman who is going to destroy the entire village.
We are in a completely different camp, in that we don't think the economy is a Frankenstein's monster at all.
In fact, we think that most of the time the economy resembles a pretty healthy individual, who should absolutely avoid the dubious prescriptions of the Keynesian doctors. We have written extensively about evidence that supports the view that the panic of 2008-2009 was the result of various forms of mad-scientist tinkering. This tinkering included:
There are numerous voices out there dispensing advice to investors based upon the premise that the US economy is just a reanimated corpse and that the end is approaching. Some of these recommendations include:
The bigger picture to this question is the idea that investors should be trying to time economic ups and downs, and to figure out whether the latest round of economic data reflects a "soft patch" or (as Peter Schiff says) "quicksand," and that they should be timing the markets based on their own economic gut feelings or those of someone else.
This is a form of "stock market guessing" and it is one of the main reasons that relatively few people make significant money from investing. In fact, such guessing is usually very, very harmful. We point out how harmful in our posts entitled "Don't get off the train."
We don't believe the pundits who are saying the current economy is a dead economy walking, whether those pundits are calling for more of Dr. Frankenstein's medicine or less of it. However, even if some rocky economic roads lie ahead, we do not believe that the answer is trying to time the market.
Instead, we believe investors are best served by sticking to a disciplined investment strategy founded upon commitment of capital to well-run companies positioned in front of strong growth opportunities.
Much of the recent economic discussion features this familiar argument: the government has been artificially propping up a broken economy, and now that the artificial stimulants are wearing off or losing their effectiveness, we are heading back down to the dark days of March 2009 and the bottom of the market, the depths of the recession, or even to a worse place than that.
This argument can be heard both from pundits who believe that government spending is good for the economy (generally, a Keynesian view, which we have discussed in previous posts such as this one and this one), as well as from pundits who believe that government spending is bad. The latter tend to think the economy was not ready to recover without those stimulants and such artificial "propping up" only served to delay a necessary "purging".
An example of the first group would be the author of this recent article from the Economist. In it, the author operates under the assumption that the government "swinging into action" is what saved the economy before, and that it is inexplicable that the Fed and the Congress are reluctant to stimulate it again since it appears to have crashed (the article features a graphic cartoon of an 18-wheeler truck -- labeled "Economy" -- crashing nose-first into the ground).
An example of the second group is Peter Schiff, CEO of brokerage firm EuroPacific Capital. He also thinks the "recovery" has been dependent on the government, but he thinks that intervention has been bad, because it has prevented the collapse of the institutions that led to the crisis in the first place. In this recent interview, he declares that:
The data that we’ve been getting for the last several weeks -- and of course today’s data merely solidifies that with the weak jobs numbers -- is that the effects of trillions in govt stimulus is wearing off, and the mother of all hangovers is now setting in. (Beginning around 2:20 in the video clip).He then goes on to say:
This is a phony economic recovery – it’s basically a giant hallucination caused by the government stimulus, which is like a hallucinogen [. . .]. That’s why we’re seeing the economic data imploding like it has been – because it wasn’t real. (Beginning around 11:20 in the video clip).While agreeing with Mr. Schiff that government stimulus is actually harmful rather than helpful (a position we have argued many times over the past years and which we explain here and here), we disagree with both points of view represented above.
Both of the above camps basically agree that the entire recovery has been the product of government engineering -- a sort of Frankentsein's monster re-animated by the government (playing the role of Gene Wilder). One side thinks that Dr. Frankenstein is a genius and that his constant supervision of the economy is a must, while the other side thinks he is a madman who is going to destroy the entire village.
We are in a completely different camp, in that we don't think the economy is a Frankenstein's monster at all.
In fact, we think that most of the time the economy resembles a pretty healthy individual, who should absolutely avoid the dubious prescriptions of the Keynesian doctors. We have written extensively about evidence that supports the view that the panic of 2008-2009 was the result of various forms of mad-scientist tinkering. This tinkering included:
- Direct government pressure to make questionable real estate loans.
- Tinkering by financial PhD's on Wall Street who subscribe to modern portfolio theory's false premise that risk can be eliminated with the right mathematical formulas and who used that theory to create billions of dollars of synthetic investment vehicles.
- And, last but not least, a well-meaning but disastrous accounting rule known as mark-to-market accounting, which caused the holders of those structured investments to panic like it was 1907.
There are numerous voices out there dispensing advice to investors based upon the premise that the US economy is just a reanimated corpse and that the end is approaching. Some of these recommendations include:
- Investing in gold and commodities (we address some of the issues surrounding that advice here and here).
- Investing in variable annuities (which we believe is almost always a very bad choice, as we discuss here).
- Investing in foreign stocks and bonds (which often boils down to a bet against the US dollar, a game that is more difficult than it looks and which has burned some of the biggest investors in recent years, including George Soros and Warren Buffett).
- And, last but not least, investing in one of the 31 flavors of "alternative investments" (the ramifications of which we discuss in this and this previous post).
The bigger picture to this question is the idea that investors should be trying to time economic ups and downs, and to figure out whether the latest round of economic data reflects a "soft patch" or (as Peter Schiff says) "quicksand," and that they should be timing the markets based on their own economic gut feelings or those of someone else.
This is a form of "stock market guessing" and it is one of the main reasons that relatively few people make significant money from investing. In fact, such guessing is usually very, very harmful. We point out how harmful in our posts entitled "Don't get off the train."
We don't believe the pundits who are saying the current economy is a dead economy walking, whether those pundits are calling for more of Dr. Frankenstein's medicine or less of it. However, even if some rocky economic roads lie ahead, we do not believe that the answer is trying to time the market.
Instead, we believe investors are best served by sticking to a disciplined investment strategy founded upon commitment of capital to well-run companies positioned in front of strong growth opportunities.
