My pal and occasional CNBC sparring partner Charlie Gasparino is a great investigative journalist. His book Blood on the Streets is required reading for those who want to understand the 1990s bubble market.
Where Charlie and I disagree is often in his opinion pieces. We’ve clashed over CRA, Fannie and Freddie — GOP talking points all.
Our latest bone of contention is his OpEd column in today’s NY Post, titled AN OBAMA PANIC? MARKETS FEAR HIS POLICIES. Charlie in part blames the market’s recent selloff on Wall Street’s fear of an Obama presidency.
Note that headline and sub hed — written by editors, not the writer — is far more provocative than the actual text.
It is a well trod, flawed argument we’ve analyzed in the past:
“Barack Obama has remained cool and confident amid the financial melt down, even as John McCain at times has been embarrassing, lurching from one proposal to the next. But while the polls are reflecting Obama’s steady hand, the markets haven’t. In fact, they’re getting worse by the day as Obama’s lead widens.
Most investors know the devil is in the details – and the details of Obama’s economic plans are anything but reassuring.
Of course, the market turmoil is first a reflection of grim reality – the bursting of the housing bubble and the billions upon billions in writedowns and losses that have forced upon the hugely leveraged financial firms companies that had cranked big profits during the bubble years.
The resulting credit crunch is hitting Main Street harder than ever before. The country is headed for recession; the only question is: Just how low can the markets and economy go?
It could be a lot lower – it all depends on the policies of the next president. And, as it looks increasingly likely that Obama will be that man, the markets are casting a vote of “no confidence.
There are three flaws with that argument: EMH, Causation/Correlation error, and subjectivity.
First, markets are much less efficient and forward looking than the efficient market hypothesis idealogues would have you believe. Consider the credit crisis: It first reared its head in August 2007. Markets looked forward, and saw clear skies. A few months later, the Dow Industrials and S&P500 — both laden with banks, brokers, and insurance companies — rallied to all time highs.
So much for the efficient market hypothesis.
The second issue is the confusion between correlation and causation. As we wrote back in January, when the markets were considerably higher than where they are even after today’s 1,000 snapper:
“All too often, we see the cause and effect relationship analyzed exactly backwards, as in the above example. These causative errors are an all-too-common analytical blunder when reviewing market or economic data. Unfortunately, in seeking certainty in an uncertain world, confusing cause and consequence is an all-too-regular occurrence. The above quote is a perfect example of that foible.
To review: Markets are not skittish because the incumbent party is in trouble – that’s getting it ass-backwards. When the ruling party is in election trouble, its because the future discounting mechanism of markets is incorporating a slowing economy into its pricing. Markets may be imperfect and subject to the excesses of crowd behavior, but they eventually get the big picture correct. The current market malaise reflects a recognition what is occurring in the macro-environment.”
Lastly, consider how subjective reading anything into markets are. Markets are like Rorschach Tests — very often, the person is revealing their own political leanings, rather than shedding any insight into market action.
For example, Gallup reported this morning that Obama had opened his biggest lead yet of McCain — and the market had its biggest point gain ever. Using Charlie’s logic, we could interrupt this to mean that the market is fearful of an financial novice like McCain, whose economic advisors are a collection of money-losing know-nothings — they include the likes of Phil “Whiner” Gramm, Kevin “Dow 36,000” Hassett, Don “Quit Doling Out That Bad-Economy Line” Luskin, among others. A less economically astute concentration of thinkers have never before or since been gathered in one place. (And given his VEEP’s utter lack of any qualifications, the market is doubly upset at the ticket).
Now, other than the criticism of Gramm/Luskin/Hassett, I don’t believe any of the above paragraph. However, if you buy into Gasparino’s correlation argument, why not choose the rally on the biggest poll spread?
How well did the markets price in Bush’s presidency — 7 years into his term? Massive deficits, expensive wars, financial mayhem — mostly ignored until 2008. Why would the markets ignore all the damage Bush has wrought 7 years into his disastrous presidency, yet discount what Obama or McCain might do in the future? That makes little sense.
The answer, of course, is Charlie’s subjectivity — and if you have any doubt as to his political persuasion, just watch him on CNBC.
The bottom line is this: Markets eventually got the credit crisis right — and then they overshot to the downside. What is going on now is not a reflection of policies which have yet to be enacted, legislation which has yet to be passed, based on an election which has to take place. They are the result of a decade of bad Federal Reserve policy, weak supervision of lending standards, ratings agencies run amuck, and an exemption of derivatives from regulations/reserve requirement.
Reading anything more than this into markets is simply folly . . .
UPDATE: October 14, 2008 10:02am
Felix Salmon looks at this from a different angle: CNBC’s Gasparino Problem
UPDATE 2: October 14, 2008 10:34am
Charlie writes in:
“Of course, Obama’s tax plan is not the root cause of the market turbulence. The piece didn’t state that. But there are underlying fears from investors — I dare you Barry to go out and speak to them — about a remaking of the American economy namely through huge government expenditures and a massive increase in taxes. My point is that those factors are contributing to some of the wild swings in the stock market.
How do I know this? Because I speak to people every day. I know Obama supporters–heavy hitters who have given him big bucks–who have advised him to back of his plan to raise taxes, or to be more precise, not to raise taxes at all in this environment. Putting a value on the how much Obama’s tax plan and his plan to socialize the economy is impossible to gauge, and my op ed never attempted to do that. But to render the overall thesis “GOP talking points” is absurd.
The argument that investors react to changes in fiscal policy is real and there is historical precedent (check the 1930s and 1970s) At bottom I’m a reporter and a free marketeer and I make no apologies for who I am. I get stories because I have a whole range of sources. I know that some of Obama’s Wall Street supporters are worried because even though I’m a free-market type, I have lots of sources.
And with all due respect Barry, I didn’t even know who you were until I bumped into you in the CNBC studio one afternoon. I have a couple suggestions for you: expand your source list. Talk to people who don’t agree with you. It might make you smarter and a better investor.”
Confusing Cause & Effect: Elections and Markets (January 2008)
The John McCain Market Selloff (March 2008)
Pricing in a Bush Presidency (July 2008)
AN OBAMA PANIC?
NYPost, October 13, 2008