Monday, December 31, 2007

The latest installment of "Bearish, And Wrong"

by Peter Bernstein:

A LOT of people have been wrong about the markets and the economy in recent months. But how could so many people have been so wrong at the same time and in the same ways?

The question reminds me of the biggest and most embarrassing goof in my own career. This sad story happens to date back 50 years, to New Year’s Day of 1958. In looking back, I can now see the source of my error: I was postcasting — extrapolating past experience instead of seeking change in future experience. The aftermath was embarrassing, but it taught me never to postcast again.

I had been invited to make a presentation on the outlook for 1958 at a symposium at the Harmonie Club in New York. The program was to take the form of a debate with another economist whose view was diametrically opposed to mine. Although I was extremely bearish and would look mighty silly within six months of the debate, I was the one who swayed the audience. It voted overwhelmingly for my position and scorned the wisdom of my opponent.

There was no doubt that the new year was dawning at a dark moment. The stock market had peaked in August and was already down 13 percent. The Christmas season had been a clear disappointment. Industrial production had fallen 6 percent from its August high. Unemployment had jumped to nearly 6 percent from 4 percent the previous summer.

We could all agree that a recession was in the making. The issue was how deep the downturn would go and how long it would last, and this was where my opponent and I parted ways.

He expected the recession to be short and sweet, with a revival in the economy by summer at the latest. I saw no sign of light anywhere. A child of the Great Depression, I had been well schooled by my college professors in economics in the late 1930s to believe that the American economy had lost its long-run dynamic. So, in the downturn of 1957, I was convinced that the dreaded moment had arrived when we would sink back into the stagnation of production and employment that I had remembered so well.

But how could I have failed to notice how many things had changed? The dynamic power of the American economy was visible everywhere. The population had grown 19 percent since 1947, compared with growth of only 7 percent from 1929 to 1939. Houses were sprouting up all over; there were new kinds of cars, new kinds of airplanes, and new kinds of radios, and, above all, television was a reality. All of Europe was coming to our shores to find what it needed to rebuild after the destruction of the war; in real terms, our surplus of exports over imports had quadrupled since 1929. The United States sat on a huge pile of gold, and liquidity and consumer credit were easy to come by.

Another installment by Joel Kotkin here. Robert Shiller is not so sanguine.

Earlier installment here. I am short these (but have reduced my position):

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