Monday, May 5, 2008

The Economy is Anyone's Guess

By Alan Caruba

In my youth I was a professional magician earning money entertaining at birthday parties and even adult events. I learned a profound lesson. People like to be fooled. They will pay you money to fool them. They will applaud you at the end of your act.

I must confess, as the son of a Certified Public Accountant who thought the stock market was a fool’s game, I was always leery of investing in stocks. The few times I tried, I lost money. It began to dawn on me that no one really knows what a stock will do. A bit of bad news and its value drops like a stone. Or euphoria sends it upward like a fever.

There are the traditional stocks, thought to be safe, but tell that to the people who invested in General Motors, once the greatest manufacturer of automobiles in the world. It recently announced a $3 billion loss and, would you believe it, the stock price went up on that “good news” because the loss wasn’t as bad as investors thought it would be!

Being a writer by trade doesn’t necessarily lead to big bucks. Out of the few who make it to the bestseller lists with a novel or hot new diet book, there are literally thousands whose books went out into the world and ended up in landfills. In my time, the average writer of books was lucky to earn about $5,000 when published. I actually did earn that with a novel that was so vile I pray nightly that all of the copies have long since been incinerated.

Who anticipated the Great Depression? Few I suspect. Who made it worse? The government. Now, in an era of globalization and investing via the Internet, money can move in and out of various financial institutions and nations so fast there is no way to predict anything.

Is everybody from Hong Kong to London to New York and all points in between happy this morning? It’s mostly a matter of emotion as the sun sets on one side of the planet and rises on the other. It’s a million judgments being made every hour by people with a gambler’s nerve, perhaps some small bit of the knowledge of what is occurring, and a few dollars to spare. It’s about hope. It's about magic.

It was a shock, though, to discover that the great titans of Wall Street had gambled on subprime mortgage loans, bundling them in the amounts that ultimately cost some of their banks and investment houses billions. It was a shock to discover that Bear Stearns, the fifth largest investment bank on Wall Street, was at the brink of bankruptcy at the moment the Federal Reserve stepped in to extend a $30 billion line of credit to J.P. Morgan to snap it up.

The heads of Merrill Lynch and the Citigroup were fired for bad judgment. If they didn’t know what was going on, why should you or I? This brings us to the new or surviving titans who are assuring everyone that we are just about out of the subprime mortgage mess. Warren Buffett says we’re moving out of the mess caused by bad lending practices and worse borrowing ones.

Tell me, how many times in the past few years did you see a DiTech commercial on the air? Or one for Countrywide Home Loans? Ordinary people with no more idea of what it meant to borrow huge amounts of money than a Barbi doll just picked up the phone and received funds. It was magic!

The CEO of Goldman Sachs, Lloyd Blankfein, says, “We’re getting to the point where people are seeing the light at the end of the tunnel.” Which people? The ones with whom he has lunch at the Four Seasons?

The amazing thing about the financial meltdown is that people are getting back into the game as swiftly as they are. Investors seem to be less risk averse now than just a few months ago. It’s about hope. It’s about magic!

Americans may be the most optimistic people on the face of the Earth. Our economy is going through the equivalent of shock treatment as fuel and food prices rise. Big box retail outlets like Home Depot are shutting down a number of their stores and we are in the midst of an endless political campaign between two socialists from the Democrat Party and a Republican who's a tad liberal, but not enough to scare too many people.

America has been poorly managed for several decades. Congress hasn’t put the wheels in motion to tap our own vast natural resources. It has conjured up more entitlement programs than we can afford. It has printed “stimulus” checks and is sending them to millions of taxpayers, hoping the money will swiftly make its way back into the economy.

None of this makes me feel that good. It’s more like some slight-of-hand magic trick than smart, prudent economics.

What no one is talking about is a looming pension meltdown lurking on the horizon in which the federal government has a big stake and upon which the lives of many retirees depend.

What no one can predict is another 9/11 or an expanding war in the Middle East.

I have a cousin who is a vice president with a big investment house. He never offers me any advice, even when I ask him. He’s been in the business a long time. Maybe that’s why we get along so well?


Ralph / Donna said...

The only thing wrong with your blog is now that I am addicted and have went back and read all the old posts is I have to sit here with no "fix" for days at a time. But in these troubled times the old saying "no news is good news" makes even more sense. Good stuff, I appreciate it. Thanks, Ralph

I posted and linked you on my blog. I don't want to blow my own horn but I probably get 8 or 10 hits a day.That's right I said 8 or 10.

Alan Caruba said...

This is one addiction I highly recommend!

Thank you for your kind thoughts.

Ralph / Donna said...

It is the only one I got left.