Economic Misconceptions

Economics may be the gloomy science, but it’S also a counterintituve one. For example, research shows that stocks and treasury bonds react favorably to rising unemployment during expansionary periods (like today and the 90’s). This is because the economic benefits of lower interest rates (cheaper borrowing) exceeds the consequences of rising unemployment. That theme has been evident in the post-2008 era as stocks and earnings, as shown below, have surged despite a labor market that has been anemic up until very recently. But at the same time, I’m skeptical of pronouncements that we can just magically ‘retrain’ the able-bodied population to perform more complicated work. The problem is as automation takes over the easiest, most redundant jobs, the IQ requirement to perform non-automated work will rise, rending more and more people incapable of performing it.

It’s like: Dear worker, Wall St. just isn’t into you, sorry. Wall St. not losing much sleep over low wages, either. Low wages are good for stocks by prolonging low rates and boosting profits. Consumer spending keeps being blowout, proving that stagnant wages isn’t hurting consumption, as much as the left wishes it was. This is possible because the 1%, who have seen the most income gains, also consume the most, in accordance to the Pareto principle. Then you have all the foreign consumption, as 35% (and growing) of S&P 500 earnings are derived overseas. For example, we have the booming Chinese luxury consumer:

The left hates that China’s economy has resisted all predictions of its doom. The left wants China to have the same fate as Russia in 1991, but that won’t happen. The differences are obvious: The Soviet Union, already a weak economy, was bankrupted by the Cold War, versus China which has a trade surplus and is in a much stronger position than Russia ever was.

Liberal economist, Robert Shiller, says there could be a bubble in bonds. The liberal motto is predict early, and predict often. Predicting early means being wrong 99% of the time (a stopped clock) and predicting often guarantees being right by virtue of luck. When a doom and gloomer is finally right you hear about it constantly. They go on TV, write books, and make videos extolling their brilliance and how ‘no one listened’ until it was ‘too late’. The wrong predictions, of which there are many, are quietly subsumed by the tides of time, forgotten. Finally, they never put their money where their mouth is because their track records on these matters is terrible. Having skin in the game changes the dynamic completely because you can’t just sit on your butt and pontificate to no end; money on the line imposes some sort of time constraint. An indefinite prediction is meaningless, or to quote Fight Club, ‘On a long enough timeline, the survival rate for everyone drops to zero’ – a possible reference to the heat death of the universe, a state of maximum entropy where every orderly system must indeed fail. Shiller, like his leftist bond trader-turned-journalist compatriot, Michael Lewis, is motivated not by good will or curiosity, but by a craven desire to see the rich and successful fail. To punish the rich and create equal outcomes, the left seeks crisis, whether it’s web 2.0 being a bubble on the verge of popping, stocks crashing, or banks failing.

Perhaps one of the most glaring misconceptions, and one that is often perpetuated by the liberal media naive bloggers, is that falling oil prices are supposed to be good for the economy, good for the consumer and good for stocks. The only thing holding back the economy’s full potential are those greedy oil companies and speculators, the leftist logic goes. But, believe it or not, speculators can also cause prices to fall as we saw in 2008 and in 2014; where was the left then complaining about speculators? Speculation is not a one-way street. In confusing correlation and causation, the left will also mention how high oil prices correlated with the 2008 recession, implying that high oil prices caused the recession.

As you can see below, high oil prices did correlate with falling GDP growth in 2008 & 2007, but the main cause of the recession was the decline of the financials sector.

Falling oil and gas prices isn’t as auspicious as commonly purported by the leftist media. A NYT article discussing the impact of higher oil prices on the economy told readers that:

“As a general rule of thumb, every $10 increase in the price of a barrel of oil reduces the growth of the gross domestic product by half a percentage point within two years.”

It’s actually not quite so, as this article explains. You have to understand – as the media always neglects to explain – that consumption on energy and gas still goes into GDP, just like all other forms of spending like, say, TV and clothes. It’s not like one form of consumer spending has a higher weighting than another. $100 spent on gas is no different than $100 spent on food or $100 spent on video games. As the article mentions, rising energy prices benefits energy companies, and consumers will dip into savings in response to rising energy prices, resulting in consumer spending remaining stable or even possibly increasing. This is because gas and energy are essential (good luck walking to work) and are inelastic, meaning that demand is unaffected by change in price. And let’s just assume that falling oil prices is directly good for stocks, one would expect this to benefit retail stocks, but the data shows otherwise. In 2014, as oil prices plunged 50% (the greatest decline since 2008), retail stocks fell too, until finally regaining ground at the end of the year as part of a broader market recovery. Looking at the charts, retail stocks saw no immediate, statistically significant benefit from falling oil prices that could be reliably discerned from other factors. In accordance to the efficient market hypothesis (which experts assume holds most of the time), if the market is a real time discounter of information, given the absence of a market rally in response to falling oil prices, it’s reasonable to assume the market saw no net economic benefit owing to falling oil prices. As we saw in 2008, falling oil prices can be caused by economic weakness and such weakness can offset any possible consumer gains from falling prices.