Last week Bonddad posted a diatribe against the entire economic blogosphere.
Reading blogs that in any way write about economics has generally become an exercise in utter futility. According to most good news is either propagated by corporate whores who are blind to the realities around them or presented without considering "all" the facts. All government statistics and all economists are wrong -- unless they support or present a bearish viewpoint.
Normally I wouldn't notice, but someone pointed it out to me and it got me thinking. How did we arrive at this point, where the bullish and bearish are drawn up against one another in much the same way that Democrats and Republicans in Congress are?
It occurred to me that perspective has everything to do with it.
The Case for the Green Shooters
I'm going to use Bonddad as my example of a Green Shooter. Bonddad's diatribe, by virtue of lumping together everyone that disagrees with him, and his large following, has put himself into that spot.
The essays are full of charts that shout one word: trend.
When Bonddad isn't actually using the word "trend" he is implying it.
What Bonddad is doing is called technical analysis or chart analysis. There is a multi-million dollar industry behind it on Wall Street.
And do you know what? Bonddad is right. Based on a technical analysis, Bonddad is reading the charts correctly. I have no disagreement with his bullish interpretation of the charts, and I doubt that many other people do.
And yet I am still a bearish doom-and-gloomer. How can that be?
Because technical analysis has its limits. Those limits involve time.
Technical analysis has a short half-life. The further out you try to predict the more inaccurate the analysis becomes. Predictions of more than a quarter or two are almost useless. (For an example, see this report by the Federal Reserve which predicted an economic rebound in the 2nd half of 2008.)
So what do doom-and-gloomers use to predict the future economy if not for technical analysis? We use fundamentals.
The Case for the Doom-and-Gloomers
I will use Bobswern (without his permission) as an example of a Doom-and-Gloomer, mostly because of his public conflict with Bonddad.
Bobswern, and most of the Doom-and-Gloomers, aren't all that interested in short-term economic movements. Their horizon is further out.
That's why they aren't trying to do technical analysis, which is only good on a short timeline. The fundamentals are looking 6 months, a year, or several years down the road. Completely unlike technical analysis, fundamentals are useless in the near-term, but are increasingly more useful the further out you go.
So who's right?
It's because of this basic difference in perspective that Bonddad's essays and Bobswern's essays come to radically different conclusions. Both are probably correct in using their methodology, but both are going to come to different conclusions because they are looking at different periods of time.
Any obvious mistakes would be using fundamental analysis to predict short-term trends, or technical analysis to predict long-term trends. This is where Bonddad makes his mistake.
Bonddad likes to overlay current charts and compare them to charts from previous recessions as proof of what the future will be like. In doing so he makes two major mistakes, both of which he should know better than to make.
1) "Past performance may not be indicative of future results" is the oldest saying on Wall Street. What has happened in the past means exactly zilch compared to what is going to happen in the future. Sure you can still make the comparisons, but that doesn't mean they actually mean anything.
2) The economy of late 2009 is not the same economy of 2001, 1991, or any other recession year.
Unemployment and poverty is more chronic, and debt levels are far higher at every sector of the economy. Any fundamental analysis would show this. In fact, Bonddad's own fundamental analysis show this.
Before Bonddad became a Green Shooter he used to write about the fundamentals of the economy, such as the problems with chronic government deficits.
we're creating a situation that is rife with possible future problems. And some of these problems are serious -- as in they could lead to the financial system freezing from a random world event.
I completely agree with Bonddad the fundamental analysis. The question I have to ask is why do these deficits no longer matter, especially when they are massively larger now?
Before Bonddad became a Green Shooter he used to write about the fundamentals of the economy, such as the problems with economic growth based on massive borrowing.
On paper, the economy has grown. Economists can point to the raw data and say "we grew". That is not the question. The question is "how did we achieve that growth"? It wasn't from the growth in incomes. Instead it is from a ton of borrowing. And considering the credit melt-down we've had over the last year from excessively easy credit, maybe we need to ask ourselves if this is the best way to grow a country.
I completely agree with Bonddad the fundamental analysis. The question I have to ask is why this debt no longer matters, especially when encouraging private borrowing in an already debt saturated society seems to be the only trick the government knows?
When Bonddad said that the country is collapsing under the weight of debt he was right. His statement is still right, even though he no longer appears to believe it.
When Bonddad said that Obama's plan for spending our way out of economic trouble is unworkable he was right. His statement is still right, even though he no longer appears to believe it.
I understand the message when people say that we can't worry about deficits and debt levels in middle of an economic crisis, I just think that people are missing the most important idea here: massive amounts of debt are the cause of this economic mess, so why would even larger amounts of debt be the solution?
Bonddad the fundamental analysis is right. We need to address this problem and soon, otherwise the economy is going to crash. Bonddad the Green Shooter is right that the trend has turned up in the short-term.
Bonddad the taunting, "I know better than all these bearish people" is wrong, he doesn't know the future any better than the rest of us.