Camaraderie of the Damned

There is not a lot of action in the markets. Most of the investment world is home for the holidays… At least, the investors are home. The pros – the bankers, for example – are celebrating the holidays in fancy resorts. They can afford it. It was a great year for the financial sector. After nearly going broke because of their reckless speculations, the bankers took money from the feds and went on to speculate some more…making huge profits. Bonuses for many of them were better than ever.

Yes, dear reader, 2009 was a strange year. It began strangely…and ended the same way. After many years of going the other way, finally, the rich were NOT getting richer. At the beginning of the year, they were getting poorer, big time, as the value of their stocks fell in half…and the value of the real estate dropped 30%. But then the government stepped in and made sure that at least the richest of the rich didn’t suffer too much. And then, thanks to a natural bounce and a very unnatural amount of money from the feds, the rest of the rich didn’t end the year too badly either. The FTSE world index closed yesterday within a few points of its high for 2009….and the US market ended very near the level it was when Lehman Bros. went broke. Of course, that still left investors a little short, if they looked back at their 2008 high. The Dow is still down about as much as houses – about 30% from the peak.

You will notice the lack of precision in our figures. Most of the financial press prefers to tell you, for example, that the Dow is down 31.8% from its 2007 peak…or that copper is up 42.5% in 2009. We avoid such precise numbers, partly because we’re no good at math and too lazy to look it up…and partly because we think precision, in our business, is a fraud. Prices move all the time. By the time the reader finds out that copper is up 42.5% the fact is history. And by the time he puts in his sell order, to take advantage of the gain…it has turned into a loss. What’s more, there is no real precision in finance…or in history…or in most other things. Stuff happens. It is always a little different than you expect and never quite measures up to precise analysis. The facts won’t stand still long enough to permit it. And often, what you think you are measuring turns out to be a complete illusion…if not a complete bamboozle.

Take another example: GDP. When the government reports GDP growth of 3.2%…what does it really mean? Well, it means that this is the number their measurement system has produced. Anything beyond that is inference, guesswork, and theoretical extrapolation. Does it mean ‘output’ has gone up? That depends on what you call ‘output?’ Does it mean the economy is growing? That depends on what you call growth.

We won’t continue on this subject. You get the idea. GDP is itself a counterfeit. It pretends to measure the health – the growth – of an economy. In fact, it measures something much different…more appropriately called ‘activity.’ Without looking much deeper, you don’t know whether the activity is making people richer…or poorer.

Well, we got that off our chest…back to the financial news…

Back to Japan for a final laugh. Is there anything so stupid that Japanese economists have not yet taken it up? And yet, after 20 years of trying to revive their economy, the islands’ output (measured by GDP) is expected to shrink 4.3% to the 12 months ending in March of 2010.

Rather than give up and admit they can do the patient no good, the quacks keep at it. A new initiative by the Hatoyama government will focus on developing new markets – said to be worth $1 trillion – in the environmental, healthcare and tourism sectors.

We will ask a simple question: if these were viable markets, why doesn’t the private sector target them? And here’s another one: what makes anyone think that Japanese government economists are better at spotting investment opportunities than Japanese businessmen?

We’re stumped on both questions.

But government officials say these initiatives will create 4.76 million new jobs (not, 4.75 million…nor 4.77 million) by the year 2020. (Why not by March 2nd, at noon, 2020?)

The rest of the world laughed at Japanese economists in the ‘90 and early ‘00s. Here at the Daily Reckoning, however, we reckoned that they were no dumber than any others. They were just pursuing the usual claptrap policies. We went on to predict that US economists would do the same thing when their time came. Well, now their time has come; they’re doing the same thing.

So, now US economists are bowing towards their Japanese colleagues…and we laugh at them all. Bunch of morons…every one of them.

But while economists followed their simpleton theories…the markets did their work. They’ve been grinding down Japanese shares for the last two decades. In fact, they’ve been knocked so low that they probably can’t go much lower. Maybe Japanese stocks are now a buy. Maybe they are what we should put on the buy side of our new Trade of the Decade.

We’ve still got a day to think about it. Stay tuned…


Bill Bonner,
for The Daily Reckoning

The Daily Reckoning