Monday, June 26, 2006

Golden Retrievers And Train Schedules

From Bill Bonner, one of my favorite (and the most poetic) financial writers:

A large headline in the Financial Times proclaims: "Global economy heads towards a soft landing."

It is a marvelous line, made unwittingly more poignant for being placed over a photo of an addled-looking Noel Forgeard and an Airbus 320. Neither Airbus nor Forgeard managed a soft landing last week. Both crashed...the former because it couldn't deliver the planes it promised and the latter because he sold shares in advance of a profit warning that sent the aforementioned stock down like a kamikaze pilot. Five billion dollars was wiped off of Airbuses' capitalization. Good timing on Forgeard's part.

What the article itself was concerned with was not the sudden crash of Airbus, but the gentle descent of the entire world economy. How do we know it will land softly? Two hundred and forty economists have said so.

"Economic growth is set to slow this year and next amid rising interest rates, weaker house prices, high commodity and energy prices and fresh geopolitical tensions," the FT summarizes. "The global liquidity bubble, which propped up global growth for so long, is now being pricked by central banks desperate to stem surging consumer price inflation."

Here we watch the markets, too, and even more, the market commentary.

Ms. Market, we have found, is like a woman – coy, changeable and contemptuous of our efforts to understand her. Will she be perky and charming today? Or will she be sulky and distant? What is bothering her now? Oh my, my...she seems frisky today, doesn't she? We will never fathom what moves her; we might as well be a golden retriever trying to decipher the Tokyo train schedules.

But market commentary is another thing altogether. It is more masculine, which is to say it is more logical, more understandable, more reliable, and more thoroughly imbecilic. Just read the papers. You will find analyses there that even a 10-year-old could grasp. Are they correct? No more correct than a man trying to dope out his mistress's moods. Are they useful? Yes, of course. Mainly because they are almost always wrong.

Commentators, it seems, are from Mars. Markets are from Venus.

And like Mars and Venus, they move in separate orbits.

We say that, mind you, in earnest admiration. Not of the financial media nor of the pundits, but of the elegant way in which the world is designed to deceive the mass of men. In order for the markets to function as they do, most investors must be wrong most of the time. Otherwise, they would look ahead and thwart the trend. A developing bull market requires that most people distrust it. Otherwise, they would jump in right away and bring the whole thing to a premature conclusion. Likewise, a market peak needs a preponderance of bullish investors at the very moment when bullishness is the most unprofitable sentiment one could have.

The financial media, amplifying popular sentiments rather than filtering them, helps investors arrive where they shouldn't be exactly when they most shouldn't be there.

As near as we can tell, the league of extraordinary economists is right so far. They have only to look out the window; the sky is so dark with inflation hawks, it looks like a scene out of "The Birds." German producer prices are rising at the fastest rate in 24 years, we learn from yesterday's press. The European Central Bank is tightening up to fight it. In Japan, the ZIRP – or zero interest rate policy – is set to end "without delay," says the country's top central banker. China, meanwhile, has begun taking liquidity out of the market as quickly as its own central bankers can manage. And, in America, a further rate increase next week is said to be a "done deal," with another one now expected in August.

"By curtailing the rate of growth of liquidity and making it more expensive for companies or individuals to borrow," the FT continues, "central banks are hitting share prices, bond markets, commodity and precious metal prices as well as the international housing market."

Again, we see nothing to argue with. We have seen what has happened in the financial markets. Houses are not marked to market the way copper and Airbus shares are. If they were, we suspect we'd see a decline there, too.

No, it is not the landing we doubt. That is a known and well-reported fact. It's the qualifier "soft" that we wonder about. How do 240 economists know we will have a landing that is soft rather than hard? How do they know what mood Ms. Market will be in tomorrow or the day after? How does a Martian understand what a Venusian is up to?

They don't. They have no more idea than we do. But their unanimity gives us a clue about where the money will be made. With so many people betting on a soft landing, the long odds on a hard one are bound to be attractive.

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