Jan
24
Wall Street: the apotheosis of the mob
Filed Under Sunrise on KGMB9 | 1 Comment
About a week ago, an economist appeared on NPR and said no economic stimulus would halt the U.S. economic downturn because no stimulus is big enough to move a $12 trillion economy one way or another.
He was persuasive, and I bought it, initially. So, apparently, did President Bush, who soon after proposed massive stimulus and specified that it needed to be massive or it wasn’t worth doing.
But every time I think I understand something, I learn something new that shows it to be more complicated, and sometimes utterly different, from what I initially thought. So I’m always thinking, could this be wrong?
Thursday morning I figured out how the economist in this instance was wrong. He was thinking of the arithmetic. He should have been thinking of the psychology. Our economy is the world’s largest mood ring.
Two of the most important drivers of our economy depend heavily on subjective considerations: consumer spending, which accounts for 70% of all U.S. economic activity, and the stock market, where most of what happens is the direct result of guesswork about what other people are feeling.
The Federal Reserve Bank of San Francisco, whose jurisdiction includes Hawaii, issued a report last year on research that found that economic downturns “behave” differently and can last longer when there is a lot of general press coverage of it.
After years of prosperity, most of us have a lot of books, DVDs, music, games and other amusements. If we “feel” less affluent or more inclined to be frugal, we can easily dispense with a lot of entertainment spending for awhile. We can spend less on vacations — very few people ever choose to skip a vacation altogether, but passing up Italy for Vegas is quite common in perceived lean times. We may go ahead with plans for a new car, but buy a cheaper vehicle than the one we originally planned on. We can cancel plans to trade up to a bigger house and stay where we are.
This is key: We may do these things, not because our income is down, but because we have heard a lot of press reports of a slowing economy and we have general worries about the future, none of which are yet reflected in our own finances. Our own job — O.K., it’s Hawaii: jobs — may be secure, but we’ve seen New York economists on television saying that Fed head Ben Bernanke has acted too slowly. With such a dunderhead running the economy, we think, maybe we’d better put off that cruise.
Psychology plays an even greater role in the stock market, where traders are forced to consider, reconsider and again reconsider, not how they feel about things, but how they feel most others will feel.
If you’re buying stocks for yourself, and for the longer term, and you disagree with the general assessment that a certain company is tanking, a plunge in its stock should not scare you: you can snap up shares at a bargain rate.
But what drives the markets isn’t buyers acting sensibly on their own behalf. They are driven by traders who have programmed themselves (and their computers) to sell that stock when the price reaches a certain range. Their objective is not to execute trades based on their own best judgment but on their assessment of what the mob is thinking, the better to avoid getting “behind the curve.”
On Monday and Tuesday, Asia stock markets jumped out the window over bad economic news from the United States, impelling the Fed governors to vote for an emergency cut in interest rates. But there wasn’t any important new economic news Monday and Tuesday. They were reacting to developments that U.S. traders had already digested on Friday. Those developments, which did not greatly add to our knowledge of the cooling economy, did not bother U.S. markets as much as they bothered Asia markets three days later.
It was as if the story had become exaggerated in the retelling.
It is unnerving to realize how little markets and the economy have to do with mathematics.
But precisely for that reason, economic stimulus that should be too small to move the economy may be plenty big enough. It doesn’t have to move the economy directly. It only has to move consumers to resume their normal spending patterns and they will move it.
A vague announcement of a tentative stimulus agreement Wednesday night between Congressional leaders and the White House was enough to halt the Dow’s dive, even though it’s nowhere close to being passed and will almost certainly be in somewhat different form when it does.
Traders think, or they think other traders will think, that this means those people in Washington, D.C., aren’t dunderheads after all.
What are cruises going for these days, anyway?
Jan
24
Huhu at Hale Honu
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The move to have the state buy Turtle Bay is a brilliant strategy, because it will advance the goals of North Shore preservationists whether the state buys Turtle Bay or not.
Hawaii readers of this blog will know that Gov. Linda Lingle, in her State of the State address this week, stunned lawmakers and the public alike with a proposal, not previously disclosed to anyone including the current Turtle Bay owners, to prevent rampant development of Oahu’s North Shore by simply acquiring the resort.
The purchase would be expensive, but the state could afford it more easily than most buyers, and in any case the governor says she has a bunch of ideas for various ways to raise the money. It is not merely feasible, it is sensible, since blocking Turtle Bay’s owners from building several more hotels will take off a lot of pressure to add roads and other infrastructure that will cost even more than the resort.
But that’s not the inspiration for the idea. Gov. Lingle made it plain that it’s a quality of life issue. She cited not merely the desire of North Shore residents to keep the country country, but asserted that the North Shore is an escape valve for southern Oahu residents, for whom the availability of a pleasant ride to the North Shore is an important part of their happiness in Honolulu even if they only undertake the journey once in awhile.
The current owners of Turtle Bay kindly made the issue stark by proposing that the northeast corner of Oahu should have five hotels, asserting at the same time that the effect on traffic would be negligible. They could not have spurred more community opposition if they had called a press conference dressed like Snidley Whiplash. They would always have been opposed by people with bumper stickers for brains; by taking such a nanocephalic view of things, they drew reasonable people into the opposition as well.
Public sentiment matters most when it is broad as well as heartfelt, as when development of Sandy Beach was blocked. Hawaii Superferry provides an example of how even passionate opposition is not enough to block a project if opponents’ views are not widely held by the majority of the public. The owners of Turtle Bay so mishandled their own situation, however, that even Starwood Hotels & Resorts Worldwide backed out of a plan to acquire the resort.
What makes Gov. Lingle’s announcement brilliant is that it will deter other mainland investors from even looking at acquiring Turtle Bay.
Deep-pocketed but shallow-brained investment firms, who are moving a little more carefully these days anyhow, will now know that the main selling point of Turtle Bay at the price the owners want, the well-ripened and utterly outdated approvals for more development, not only have passionate opposition from North Shore residents but also determined opposition from government, whose chief executive saw so much breadth in the opposition that she knew she could get headlines merely by suggesting that the state buy the resort.
Two weekends ago I drove to the North Shore to view the big waves from the air conditioned comfort of my T-bird (I have my quality of life issues, too) and got a reminder of how gridlocked the North Shore can get with only one hotel at Turtle Bay. The day the owners of the resort said with a straight face that more hotels would not seriously impact traffic was, I suspect, the day a lot of people — including state officials — decided the owners were either too evil or too stupid to be allowed to tamper with the North Shore.
Postscript: Since writing this, I have seen some local commentators whom I respect, and whose commentaries and editorials I enjoy reading, take contrary views. One line of thinking is that Ko Olina looks nice, so maybe Turtle Bay could be developed and still look nice. This isn’t persuasive and after pondering it over the weekend I think I can explain why.
Northeast Oahu is still fairly rural and scenic. More hotels will make it less so, period. Ko Olina, on the other hand, has a power plant on one side, Campbell Industrial Park with two oil refineries on the other, and, inland, the island’s only dump. Compared to all that, Ko Olina is indeed an improvement. It even improves the drive to the scenic Leeward Coast, but only in relation to these other things.
The governor’s point about the important of the North Shore to people who live in the city is, I think, as one who lives in Waikiki, a valid one, and one that can be extended to include the drive around Makapu’u Point, the Upper Windward Coast, and the Leeward Coast. The quality of life here depends on limiting growth in the areas that are still scenic. Some Democrats in the legislature feel the same way, but everyone is struggling with land use law because the only way to slow growth is to tell some landowners they cannot consider their holdings as an entitlement to degrade the scenery, after so many other landowners got to do just that.
Jan
22
Low unemployment isn’t good news for you if you’re out of work. The story isn’t your story. You don’t even have an excuse to give your family, like you would if things were rough all over.
All financial news is like that. Take puts and calls. Those are financial investments the way Vegas would make them. A put is a contract to put shares of a certain stock into someone else’s hands before a certain date at a certain price. A call is a contract to buy shares that way. In each case, you are betting the other person that the stock will go the opposite way from what he thinks. If you’re an airline and you do fuel hedging, you contract for jet fuel delivery later in the year for a certain price. You’re betting that this price is lower than what jet fuel will actually cost by then. The company that agrees to such a contract is betting that you’re wrong.
If you’re a bankruptcy attorney, the last thing your business needs is prosperity.
Those are the three counterintuitive things about financial news:
- Within any broad trend are specific instances that can be all over the map.
- Many financial transactions are created so that one side will “win” and the other will “lose.”
- Some things are countercyclical, doing well when everything else is doing badly.
Take what happened today. After two days of stocks tanking in Asia (Monday and Tuesday, equivalent to Sunday and Monday in America), European markets began following suit, so the Federal Reserve Board took emergency action, cutting interest rates three-quarters of a percent, the biggest cut since October 1984. Wall Street opened badly, as backed-up sell orders sent the Dow plunging more than 400 points, but two hours later it was down only about 100 points as bargainhunters entered the market.
Bargainhunters benefits from stock market plunges, assuming they’re any good. Some perfectly good stocks were selling at a 10% discount for awhile Tuesday.
Healthy businesses could benefit from the plunging share prices, because it induced the Fed to slash interest rates and now they can borrow money more cheaply.
Hawaii will suffer if an economic slowdown (whether it is or becomes an outright recession or not) slows tourism. We get more visitors from California than anywhere else and California’s economy has the vapors, especially its so-called “Inland Empire.” If Californians feel insufficiently affluent to take a Hawaii vacation, we’re going to get the vapors, too.
But unless that happens, Hawaii could actually benefit from what’s going on.
The dollar is weakening a lot because of the interest rate cuts. This puts Hawaii on sale for the Japanese, as you have read here before. It also makes Europe really expensive for U.S. mainlanders, some of whom might decide they would rather see Hawaii than Italy.
Uncertainty means lower mortgage rates and anything that makes housing more affordable is good for Hawaii.
Stay tuned.
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