Baruch is getting schtick in the comments for a now mildly embarrassing post he wrote at the high tide of equities in 2007, criticising the Economist’s now not totally un-prescient looking Buttonwood column. Reader John goes so far as to suggest that Baruch now looks like a “jackass”. Reader Anish, finding it hard to avoid exclamation marks, says he hates “rubbing it in” and of course proceeds to do just that.
While there are some fist-bitingly cringeworthy bits, the substantive points Baruch was making at the time, viz perma bears are not normally useful, and that the Economist has an especially dreadful record in giving stockmarket advice, still hold water, I think. I wrote of the
tendency of commentators who are Obviously Clever to be negative about the stockmarket, and how in this they are generally completely wrong, at best, or at worst simply confusing. It’s not as if you can use them as contra-indicators because sometimes, just often enough to keep them in business, the stockmarket actually does go down
(emphasis added post hoc, or is it hic). I would say similar things about perma-bulls, like Larry Kudlow, as well. But readers like Anish and John, no doubt open, trusting, simplistic creatures seeking guidance, only see the track record of the last 18 months. They compare Baruch’s inability to forecast the last downturn to Buttonwood’s annoyingly accurate diagnoses of what was going to happen, and find him wanting. Buttonwood 1, Baruch 0, they think. Well, it’s not unfair. In Baruch’s defence he can only argue that he was a fast follower, and 2 months after bashing Buttonwood joined him in becoming all miserably bearish as well. At least in print.
However, recent Buttonwood columns have made at least two points that are wrongly used in support of a continued bear market. Firstly positive feedback loops in bull markets, Buttonwood claims, can go into reverse in bear markets and prolong them “with devastating effect”, just as they helped sustain the bull. One mechanism is rising tax rates, as government deficits grow. Another is company pension funds going into deficit, forcing companies to top them up, further draining cashflow. It’s not as simple as that actually, as the discount rates used to calculate pension obligations often fall with interest rates, but I will stop here as there is nothing more tedious than calculating pension obligations. We can go with Buttonwood on this one too.
The other mechanism that prolongs bear markets, according to Buttonwood, Citigroup and a study by something called Smithers & Co, is a change in the supply-demand for equity paper; bear markets see the end of many company buy back programmes, and the need to raise equity capital to refinance stressed balance sheets reduces the demand for equity while increasing its supply. Doom follows, naturally enough. There are 3 good reasons for thinking this is totally wrong: Continue reading
