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By now I would think most people, even many of those who won’t admit it, see what a joke President Obama’s – in essence – speech-based economics policy is. It’s not even that his approach is directly bad for the economy. It’s just that it’s all so beside the point, a giant living non sequitur, a ritual action repeated over and over again with never any different effects, almost to the point of insanity. Morgan Freeberg lays this out quite well so no need to rehash.
The enduring mystery then is why Obama’s speeches so consistently ‘disappoint’ and suppress the markets. One of my rules of thumb is that if Obama is talking on TV, it’s time to SELL. This strategy has never blown up on me thus far. But this ‘disappointment’ effect would only seem to make sense if the markets actually expected something tangible and positive to result from, say, Thursday’s Obama speech. And I don’t know anyone anywhere who did! So what’s going on?
Let me describe a possible dynamic. Let’s stipulate that almost everyone is pessimistic about the economy: they see continually bad economic data, and so they want to be positioned correctly for it. So fundamentally, people are short (in one way or another; delaying a major purchase you would’ve otherwise made is one way of assuming a ‘short’ stance, for example). When you’re short, the one thing you fear is a sudden rally mania that you miss out on. You don’t fear this if you believe in your short, but you do fear it – constantly – if the short is defensive and tentative. I suggest many people are in the position of effectively being a fearful short in this sense.
Now enter the government of various stripes. President Obama, Ben Bernanke, Angela Merkel, the ECB, whoever. Each of these actors from time to time comes out with a big public thing, an Event, that everyone will be watching, announced in advance and marked or mentally marked on everyone’s calendars. (Another thing that can count as an Event is simply an election somewhere.) Now logically, in none of these cases – especially some President Obama speech – do normal sane market actors expect the Event to actually singlehandedly turn the market around in any tangible way via its direct effects.
However, they’re afraid it might, because really, who the hell knows? The market is irrational, and can stay irrational longer than you can stay…well you know the rest.
Thus, going into the Event, all the fearful shorts cover themselves. The effects of the Event are so unknown and unpredictable that no one feels comfortable taking a stand one way or another. The way this plays out in the market is that it hangs in there, or maybe even rallies a little, up to the Event. This is because for every pessimist with conviction selling, there’s some fearful short out there ready to buy to cover that short on any downtick. So there is a sort of stalemate, a false stability, in the markets.
Then the Event happens – President Obama gives his stupid speech – and people can see how hollow it is, that it’s not going to have any effect other than, if anything, a negative one. The shorts, breathing a sigh of relief, suddenly feel confident again and come back out to play. The previous short-covering support is no longer there. Result: the market collapses.
I’m not sure my dynamic is the correct explanation, but nothing else makes any more sense. Objectively, of course, it’s not very easy to explain why President Obama’s speech would lead to a market drop. I may think the hype over the speech was dumb and the content vacuous, but it’s not as if President Obama’s speech made anything worse, right? So why would the market respond like this? Ditto for Bernanke’s speech, etc.
If you buy my explanation, it’s because the market wanted to be shorter than it was, and believed in being short, because they don’t like being long risk at the moment – but the market was collectively holding its breath, unsure what sort of monkey wrench this or that government Event would throw into their careful, confident analysis. Because you just never can tell. So in essence there was a pre-Event support level, a sort of mini-bubble, that only felt comfortable bursting once the Event was behind us.
Let’s suppose my explanation is correct enough. What are the conclusions that would follow? It’s hard to say. One tactic could be to say that the pre-Event bubble was nice and good (after all, prices were kept propped up, and things looked like they might turn the corner, for a while), hence we should want more of them. President Obama should schedule a speech a week! Content doesn’t matter, just read out of the phone book. The point is to keep the market always looking and guessing and watching for the next Solution. Another stance can be to say that the market needs to find its bottom to return to health, to wash all the pessimism out of its system, and all these mini-bubbles just prolong and delay the pain, so we should want fewer Events causing mini-bubbles. Thus, President Obama and all the rest of them should STFU.
I don’t know which is ‘correct’ (clearly I lean toward the latter) but there’s a third approach one could take, which is simply to observe that volatility is harmful. With that in mind, stance #2 is clearly the better one. Mini-bubble, mini-pop, mini-bubble, mini-pop is good for no one (except perhaps day traders).
If you followed me this far, then the obvious conclusion would have already come to your mind: the government needs to stop spooking and shocking the market with this continual stream of Events. Radio silence should be the order of the day. No big Speeches, no proposed Solutions. Just knock it the hell off! Essentially, to paraphrase one of the greatest movies in history, we need everyone in government and leadership roles to perform a Maneuver X.
Ted: Have you ever heard of Maneuver X? When you get deeply into sales, you realize that every major transaction involves a mini identity crisis for the buyer. You think, “Green carpet. Am I really a green carpet person?” In romance, the same thing applies but on a humongous scale.
Fred: But what is Maneuver X?
Ted: It’s removing all pressure, creating a space that the customer has to affirmatively cross. Only by disappearing more thoroughly and inexplicably than Montserrat can I change the current dynamic.
…Fred: But isn’t Maneuver X just another way of putting what we would normally refer to as, ‘playing hard-to-get’?
Commentators continually agitate for this or that ‘solution’ by our genius masters in the managerial-class government. Theirs is a managerial attitude through and through, a perpetual idea that our economic troubles are something that can be managed away by cleverness, by tweaking the right dials, by just finding the right lever to push. Hey guys not sure if you’ve noticed but it hasn’t exactly worked.
So why not try Maneuver X? Just think if Obama and Bernanke and the ECB and all the rest were to (rhetorically) disappear thoroughly and inexplicably, to create a space that the market has to thoroughly cross. You scoff. You laugh. “But then…there’d be nobody to…but then…nobody would be…” you stammer. But you don’t really have a good counterargument do you? Because really, to put it bluntly, doing stuff hasn’t worked.
The observation that the government needs to STFU and back off is something I wrote near the beginning of two thousand fricking nine for crying out loud. Can anyone read the second half of that expletive-laden, desperately-shouting post I wrote in the first half of 2009 and deny that (1) the government didn’t take my advice, and (2) everything I was complaining about and predicted would come to pass if they didn’t, came to pass?
I don’t know why I even wrote this post. The “stimulus” is going to go through. Things are going to get worse not better. We will be stuck in this rut far longer than we need to be. And all I’ll be left with is the cold comfort of being able to link back to this post a year or three from now to say ‘I told you so’. I’ve seen the future and let me tell you, it’s depressing.
Well, I told you so. Sigh.
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