Commentary

Conventional Idiocy Takes Hold Again

It’s been another stellar week on Wall Street. Good news came from the housing front (prices rose for the first time in almost three years) and the labor market (the number of continuing jobless claims fell to the lowest level since the middle of April). And the profits reported by many large tech firms beat analysts’ estimates. These developments were embraced as proof positive that the recession would soon be history – the dismal performance of the world’s largest oil companies was greeted with less than a shrug. So the summer rally rolls on.

I have expressed my skepticism about reading too much into the glimmers of less than lousy news that trickles out concerning employment, housing and corporate profits. My opinions are based on what I dig up during the week on financial sites, such as Bloomberg, Barron’s and the Financial Times. I also read the well-trafficked and credible financial blogs, such as Naked Capitalism, Calculated Risk and Mish’s Global Economic Trend Analysis. I think that it is necessary to find alternative views that are supported by facts and logical reasoning, and seasoned with a grasp of financial history. I believe this is much more useful than stewing mindlessly in the five minute financial web news cycle.

A wider range of information resources helps to counter the punch of conventional wisdom, which, as we all know, got us into this mess. (Because of its dismal track record, conventional wisdom will be referred to as conventional idiocy for the duration of this piece.) Conventional idiocy was the fuel that propelled the housing and credit bubbles, leading to the largest financial crisis since the 1930s. And it is now proclaiming that the beast unleashed by the asset bubbles and consumption orgy is about to die.

I think that the beast that wreaked so much havoc on our financial system and economy is far from dead – it is just resting. This opinion is formed from the economic and financial news that I discover each week, from the sites I mentioned earlier. Below, I list links to articles that should make you hesitate before diving into the stock market to bask in this summer rally. (It’s helpful to remember that many of the writers on mainstream financial websites – the creators of conventional idiocy who were in dire need of anti-depressants just this past March – are proclaiming that the recession is about to end, and that now is the best time to buy stocks.)

Wall Street Analysts Keep Telling Big Earnings Lie: David Pauly (According to this Bloomberg piece, it appears that the analysts are up to their old tricks, highlighting jerry-rigged net income figures, and ignoring the inconvenient issues such as weak revenues and the negative effects of stock option grants to employees.)

PennyMac Poops, Not Pops, on Debut (This Barron’s article, by Randall W. Forsyth, discusses the recent lousy performance of PennyMac, a real estate investment trust (REIT) set up to buy distressed mortgages, run by Stanford L. Kurland, former president and chief operating officer of the giant peddler of subprime mortgages during the housing bubble, Countrywide Financial. Forsyth points out that the artificial support granted by the Federal Reserve for the banks holding toxic assets has retarded the healthy market process that entices vulture investors to step in and buy garbage at the price garbage should sell for. This is why the IPO of PennyMac withered and why the mortgage mess will take even longer to fix.)

Unemployment, Not Bubble Unwind, Starting to Dominate Foreclosure Activity (This piece comes from Naked Capitalism, a smashingly good financial blog run by Yves Smith. It is actually based on a Reuter’s article, but thanks to Naked Capitalism, I, and many other skeptical types are aware that the weak job market is hitting the real estate market just as the pundits are declaring a bottom for home prices.)

Restaurants: 22nd Consecutive Month of Traffic Declines in June (This comes from Calculated Risk; it discusses a recent troubling report from the National Restaurant Association (NRA).

The Investment Slump in Q2 (Also from Calculated Risk. Residential investment declined at a 29.3% annual rate in Q2, the 14th consecutive quarterly decline.)

I am not wishing that now gleeful investors get pummeled in the fall. I do want the financial system’s massive problems fixed, and I would love to see the housing and job markets make a healthy recovery. What concerns me is that the real problems facing the banking sector, the economy and the real estate market (both residential and commercial) are being glossed over. Accounting gimmicks are distorting reported earnings. The Federal Reserve is supporting dying banks and providing generous financing for toxic assets. The federal government’s efforts are focused on saving unhealthy industrial giants and dangerous financial behemoths because they are deemed either too vital, or too big, to fail. The patterns of bad behavior on Wall Street have not changed. The Federal Reserve, by preventing one financial disaster, has laid the foundation for another, larger one in the near future. And the federal government seems more focused on protecting the status quo than on helping to steer the economy in the right direction. The hard work has not even begun, yet a consensus is forming around the mistaken belief that the worst is over, and a recovery is on the way. Beware conventional idiocy.

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