Friday, November 14, 2008

Hindsight v. Foresight

This post is for those who have been following the financial sector's current idiocy in some amount of detail.

I saw this video originally on Andrew Sullivan's Blog:

Once in a while it's important to look back and see who's powers of prognostication seem to be genuine and who's powers are mere fantasy.

The Sarcastic Weasel has known for quite some time that real-estate was way overvalued and that speculation, ARMs, and other sub-prime nonsense was going to bite us in the ass eventually (Interest only loans? Are you f***ing sh***ing me?) I was not aware until recently of the practice of credit default swapping nor how these things were knitted together to supposedly "hedge risk" (hint: when you think you've got something for nothing, it might be time for some skepticism). So I had no idea just how badly this would turn out... but apparently Peter Schiff did, and was willing to take a great deal of abuse to tell us.

Listen, if you want to understand where the economy is going... long-term-ish... you only need to pay attention to one fundamental thing: production. Look at who is making money. Usually, it's many different sectors (not now, but it will be again). Make a mental list of which sectors seem to be the most dominant. If the top of you list is populated by people who are producers, that is they make things you can use (commodities, consumer goods, equipment, music, art, I.P., etc.), or provide services that are genuinely necessary (engineering, medicine, transportation, 1 out of every 10 lawyers), you are living in a healthy economy. If the top of your list is populated by transactional parisites (financial services, politicians, distribution specialists not engaged in transportation, the other 9 out of 10 lawyers), you are living on borrowed financial time. Expect corrections. There will be a lot of very smart people working very hard to prevent that crash, but fundamentals is fundamentals; a crash is coming. Our economy is a (mostly) peacful means to exchange and distribute resources... too many transactional players and not enough genuine resources = trouble brewing.

Good news is, Wall street is run by MBAs who, best as I can tell, can be defined by emotion, denial, wishful thinking, fear, and (most of all) herd mentality. When things are widely acknowledged to be good, they rush in to buy. When there's fear, they panic. Why is this good? Because, eventually, despite their best efforts, the market will eventually correct itself... if I had did a chunk of money to invest, I'd be looking for (long-term) bargains... not just quite yet... but soon. Short-term, there's a fair amount of pain left to endure.


Reverend0 said...

Peter Schiff is my hero.

ish said...

I forget now where I heard it, but somewhere around a year ago I heard someone say that when you start seeing dentists quit their practice to flip houses then you know you're in a bubble. Actually, you saw the same thing in the dotcom, as "genuine" producers of wealth quit producing to day-trade online. So I'd say your analysis is spot on.

Which means both of us, who are actually quite busy doing real work, have thought more rationally about our economy than 90% of the TV "experts". This gives me the same warm feeling as knowing that I have spent more time thinking about how to solve the problems in Iraq and Afghanistan than the Republican VP candidate.

I really want to find video of Laffer apologizing to Schiff. And paying up on his "more than a penny".