Did you have a good weekend?
1. Welcome to the Republic of SubPrime
Say you want to invest in the largest, deepest, most public, most journalistically-scrutinized debt market in the world. Will you be swayed by what a round-table of analysts churn up? After all, they are looking at the same information as everyone else. Ok, so what if our round table of analysts made a $2 trillion dollar mistake? What if this same round-table only two years ago proved blind to the greatest bond risk mis-pricing in history (MBS and their backing CDOs)?
A huge mass of people want to bet real money on this market, and they’re willing to take a 10-year risk at 2.75% return. A huge mass of institutions – all run and staffed by people far-better compensated than an S&P analyst – wants to make a bet on this market for a 2.75% return. It is nonsense to think a small clique of analysts possess some Olympian insight outstripping the price signal of the biggest market in the world. S&P has ZERO credibility in their mush-mouth explanations of debt-to-GDP ratio baseline-assumptions, etc.
No one can divine default probabilities from debt ratios and such, at least not more accurately than the market, which is in effect all the money in the world.
These agencies are undeniably a net negative to the economy. They encourage laziness by selling firms not just research but also judgement. They promote herd behaviour. They collect fees from the people who concoct the things they rate. It’s a joke, both at the level of impartiality and the bizarre idea that some company can gather more information than the entire market. For example, Warren Buffett owns Moody’s. If Moody’s ratings were better than the markets, Warren Buffett would simpy turn the personnel of Moody’s into a hedge fund.
That said, say I run an agency that rates default risk. First, every day I thank God I am being well paid for running something that has no right to exist. But that leaves the whole rest of the day to do something. Say it is August 3rd. One of my ratee countries has just missed default by 12 hours, with a fair percentage of its population and political class expressing the belief that a default would be no big deal…
Yeah. It’s a no brainer.
2. And yet several hours later, they’re starving again
Hey, China: You’re aware that you don’t have to buy US bonds right? You’re aware that the US bonds you now hold earn higher coupon than our low-interest on-the-run bonds, making them quite saleable at a good price, right?
So hey, China: shut the f•ck up.
3. What Would Jesus Did?
Thanks for the national prayers, Rick. Dark times, man, I’m with you. Let’s ask Jesus. I mean, after all, Jesus lived through probably the most resonant event in world political history, the transformation of Rome from Republic to Empire. He was raised in an uneasily occupied country with competing religious and secular authorities. He was born in a manger because of taxes!
That’s why whenever JC sat down with his disciples, he liked to talk politics. He was obsessed with debt, for example. “Rome has a spending problem, not a taxing problem,” he’d say around the fire on the shore . “Render unto Caesar what is Caeser’s,” he is reported to have said, but less reported is the follow up: “but that tax better be flat and low.” He threw the moneylenders out of the market, for heaven’s sake. (Literally.)
Of course, when intones Pastor Rick, “we see fear in the marketplace,” Jesus could also be blamed for that. He seemed to promote a lax work ethic (“drop thy nets” etc.), but who knows the effect of generous unemployment benefits for Galilean fisherman who want to go on a “spiritual quest”, let alone health cover for their various martyrships. (Herod? Communist.) Yes, the core of the Republican party has a camel-needle problem. No getting around (or through) that. And while both Jesus and Rick have experience with capital punishment, Perry once bragged of executing an innocent man while Jesus was executed as an innocent man…
Sarcasm is the only way to respond to this nonsense. While lip service was paid to the idea that Jesus wasn’t very political, after holding a stadium size prayer rally in the weeks before you announce your presidential candidacy. Jesus may not have a political party but as between “Greater economic liberty and lower taxes will lead to higher growth,” instead of, say, “feed the poor and comfort the sick”, I think his preference would be clear. Then again, if Jerusalem c. 33 CE had a mega-stadium funded by an oil company, ringed by luxurious suites issuing forth with mammon, conceived in the promotion of wildly violent entertainment held on the Sabbath, maybe Jesus would have Sermonized there instead of the Mount.
4. Give ’em Hell, erm, Barack
The Sunday New York Times gifts us (us= the internet; rebuttal here) several thousand words of impressionistic analysis on Obama’s lack of “overarching message”, his vagueness and indecision, his reflex for conciliation. The author of the piece uses “psychological insight” to conclude that the problems of Obama would have been fixed by a better speech. If he’d only told a compelling story. The American people – the poor, the set upon, and the predisposed to liberalism – would hear that story, rise up, and sweep the plutocrats and nihilists to the…
Look, I’m obviously suffering from Obama disappointment, too. Is anyone not? But imagining power interests will be defeated by a good speech that rouses a torpid populace is magical thinking.
The other prong of the essay, though, is that American voters prefer “centrists who help them solve their problems”, not centrists who are mere conciliators. The first half of this is semi-tautological, but it interests me in connection with another piece I read this weekend, the account of the bin Laden raid in the New Yorker. (It is an absolute must read.)
Obama comes off well in the piece, calmly working through his options, commanding and making decisions. He even got off 9 holes of golf before the raid. I was struck by the similarities between him and that other great lacker of the “vision thing”, George HW Bush. His decisions, like Obama’s, seemed marked by careful consideration, a disdain for sudden moves, but also a steely willingness to commit when required, especially in foreign policy. GHW Bush executed the Gulf War and conducted a tough symphony as Communism collapsed. Obama “defeated” our greatest post-Cold War enemy, and extricated us – pending – from two wars.
These parallels do not cheer. If Obama loses in 2012, we will have two one term Presidents sandwiching two two-termers. And similarities between the two-term Baby Boomers, GW Bush and Clinton, run equally deep. GW Bush and Clinton are both appetitive, emotional, and visceral. They lusted as the boomers lust. They, as the culture that raised them, adored their internal versions of reality as valid and meaningful in their own right. GHW Bush and Obama, on the other hand, are reserved, cautious, and see themselves as conduits of larger forces: GHW Bush believed himself the link to an establishment of WASP decency that created the American century; Obama sees himself as a prototype of an ascendant rationality, a devastating technocratic argument that would win over partisanship with logic, fact and calm argument.
That’s my “psychological insight”, anyway.
Why no cheer? I think the “centrists want” someone like them. That’s their squishy secret. And when they elect someone that isn’t like them, which they periodically do, they turn on them and turn them out. When you consider Obama’s chances for reelection, ask yourself which of the two character types above looks more like the typical American voter?
The Week Ahead:
Market reax to the downgrade dominates. Increasing discussion of the dread “double dip”. Europeans leaders consider whether the collapse of the Euro is worth leaving the beach. Austerity England riots. The US pivots to jobs (sigh). Republicans gather in Iowa to get their story straight on how Obama caused everything.
European football leagues open, so you’ll be listening to this again. Golden Gate Park pays her bills on well-meaning hippies, fans of Zach Braff, and people who’ve never been on the west side of SF in August before. Plums are ripe eating. Shark Week is over on TV, but not live. (I’ve seen the Ocean Beach one.) On that note, the surf stinks.