Wednesday, August 19, 2009

When Will We Ever Learn?

Yesterday, the markets shook off Monday’s 2% drop and confirmed that the recession is really, basically over and we should all be back to the heady days of 2007 all over again really soon. Thanks to the surgical intervention by those who “didn’t see the crisis coming”, the market has vindicated these activities and we’re really out of the woods now… really…trust me…

Now I know that there are those of us who look at economic data and see vortices of wailing and gnashing of teeth while we are told to see the resilient hubris of the dons of Gold Men, but let me introduce you to a theme that we’ll be examining here in the next few entries.

Based on the best available data in the U.S., publicly traded companies (approximately 0.01% of all corporations in the U.S.) account for less than 1% of the employment and value creation in the U.S. however, according to the Federal Reserve’s Flow of Funds data, get credit for close to 90% of the reported value of corporate equity in the U.S. Pronouncements about the health of the market – derived from the statistically irrelevant sample of Dow Jones Industrial Average or S&P 500 constituents – are alleged to be indicators of market health and economic failure or success. And, the good news is that the Federal Reserve – as it has no way to measure the value in the vast majority of the engine of our GDP – simply ignores those companies that don’t generate trading income for investment banks. Ironic, isn’t it that our financial mavens come from investment banks that live on the illusion that the pitiful minority of firms who trade stock publicly are all that matter? Friends, if you sat through any statistics course in high school or college, you understand that we have a profound failure of sampling in our diagnostic data.

If we examine the Flow of Funds data, which I am going to report on for the next few entries (assuming I don’t find another distraction) leading up to the much anticipated September reporting, we can see the seeds of the ignorance that led us into the maelstrom and the reason why we’re no closer to escaping it than we were on the glorious day when Merrill’s bull escaped the rodeo only to wind up facing the Matador (trust me, this is going to be a great metaphor in due course).

Let me entice you to read subsequent postings with the following. You know that I’ve been trying to illuminate the colossal risk our domestic industries (to say nothing of Europe and Asia which may actually be worse) have on pension illiquidity and miscalculated leverage on actuarial funds. By using the Fed’s own data I will show you that if they used their own data, they would be sounding alarm bells too but, that, my friends, wouldn’t support the popular message that we’re on the mend. This willful ignorance arises from the convergence of an over-sampling of public company data; an under-sampling of private company leverage; and a failure to understand the dynamics of the actuarial requirements of pensions and their associated risk transfer market components. I’ll do my best to weave these threads into a tapestry that you can explain to your kids. We’re not and our addiction to exuberance and greed is merely prolonging the agony that’s inevitable for those who are unable or unwilling to interrupt the dance of the market madness. More to follow.


1 comment:

  1. You had me with "Merrill's bull" and (BofA's) "Matador." I so wish we'd get to the punchline of this 20th's century economic satire already and begin building anew.


Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave