What to believe now?
It is days like this that one must go to the base economic theory and look at some real numbers. We should also evaluate some of our assumptions.
Real Numbers: Because the amount of leverage allowed into the economic system was not measured or quantified we have no idea how much that excess leverage seeped into the real economy. The bad part, since we have no idea how much came in, we have no idea how much is going to come out. Since we did not measure the seepage into the real economy we have no basis for the size of the coming contraction. What is the real, natural state economic level of SP500 earnings? Will earnings really drop by a third? This is the time to go back to basics and decompose GDP by income: Wages, Rent, Royalties, Interest, Dividends then project that income forward, deriving expectations for GDP. Model where and how that income will be spent. Now you will have a basis for SP 500 earnings and with that a price level for the index. A few blogs ago I said the economy is going to contract between 15-20 percent. With GDP 20 percent smaller, what does your SP 500 model say earnings will be?
Assumptions: Have our economic leaders been honest with us? Did they share with us their full data set? The answer is NO. Economist believe in the economic theory that our economy is nothing more than a series of self fulfilling prophecies, seeded by them. Greenspan, Paulson, Bernanke, Summers, and many, many others "talk" the economy up and rarely share negative forecasts. Their lack of honesty in this case has exasserbated the problem by eliminating any trust that did exist and convinced the general public that they are incappable of being correct.
There is much discussion of who the next Secretary of the Treasury will be and they should start before the new President is sworn in. Senator McCain or Senator Obama please pick someone not from Goldman Sachs and make them swear to be honest and forthcoming with the American public. Telling us everything is ok when we can see with our own I eyes that things are not ok just contributes to the lack of trust in government. Preying on our fears would be just as wrong, so don't make more of a deal than it really is.
Remember, without trust a dollar bill is just a piece of paper that isn't big enough to wipe your ass.
Real Numbers: Because the amount of leverage allowed into the economic system was not measured or quantified we have no idea how much that excess leverage seeped into the real economy. The bad part, since we have no idea how much came in, we have no idea how much is going to come out. Since we did not measure the seepage into the real economy we have no basis for the size of the coming contraction. What is the real, natural state economic level of SP500 earnings? Will earnings really drop by a third? This is the time to go back to basics and decompose GDP by income: Wages, Rent, Royalties, Interest, Dividends then project that income forward, deriving expectations for GDP. Model where and how that income will be spent. Now you will have a basis for SP 500 earnings and with that a price level for the index. A few blogs ago I said the economy is going to contract between 15-20 percent. With GDP 20 percent smaller, what does your SP 500 model say earnings will be?
Assumptions: Have our economic leaders been honest with us? Did they share with us their full data set? The answer is NO. Economist believe in the economic theory that our economy is nothing more than a series of self fulfilling prophecies, seeded by them. Greenspan, Paulson, Bernanke, Summers, and many, many others "talk" the economy up and rarely share negative forecasts. Their lack of honesty in this case has exasserbated the problem by eliminating any trust that did exist and convinced the general public that they are incappable of being correct.
There is much discussion of who the next Secretary of the Treasury will be and they should start before the new President is sworn in. Senator McCain or Senator Obama please pick someone not from Goldman Sachs and make them swear to be honest and forthcoming with the American public. Telling us everything is ok when we can see with our own I eyes that things are not ok just contributes to the lack of trust in government. Preying on our fears would be just as wrong, so don't make more of a deal than it really is.
Remember, without trust a dollar bill is just a piece of paper that isn't big enough to wipe your ass.
Comments