The View from Right Field

The Stock Market’s Records Only Make Sense If You Don’t Look Down

Consider this excerpt from Friday’s The Wall Street Journal:

“Investors nudged the broad, widely followed Standard & Poor's 500-stock index into record territory Thursday …

The index is closely tracked by professional investors and its four-year recovery since 2009 reflects a growing belief that the Federal Reserve's continuing support for markets and the economy will overcome modest U.S. growth and lingering economic and political weakness in Europe. …

On one side, Italy's difficulty in forming a new government stoked fears that Europe still hasn't dealt with its financial problems ….  In addition, new U.S. weekly unemployment claims surprised economists by ticking higher while another report showed soft manufacturing activity in the Midwest.

Offsetting those factors was an upgrade to economists' estimates of economic growth late last year. The revision reinforced a broad investor conviction that Fed stimulus is helping and that the slow improvement will prompt Chairman Ben Bernanke to continue supporting markets for months to come. …

New York Federal Reserve Bank President William Dudley said that at some undetermined point, he will favor scaling back the Fed's $85 billion-a-month bond purchases, the backbone of its stimulus.

But Mr. Dudley and Mr. Bernanke remain committed to supporting markets and the economy as long as needed, which makes many investors shrug off the other comments.”

Doesn’t give you much confidence in the stock market, does it?  The stock market may be setting records*, but the U.S. has “modest growth,” and who knows what is going to happen in Europe.  The stock market seems to be hitting records because of what Ben Bernanke is doing, not the U.S. economy.

And the bond market has had interest rates artificially depressed by the Fed since 2008.  It’s great if you are borrowing now (and if you can find a bank to actually lend to you), but investors are not only getting low interest rates, but they have to worry that when interest rates go up, the value of their bonds will go down.

So we have a stock market that appears to be higher than is otherwise logical because of the Fed pumping out money like crazy, and a bond market with interest rates that are being held artificially low (and which is on the edge of big drop in value once rates go up again). 

I don’t know if these conditions constitute bubbles, but they sure sound scary.

Plus if you think that one of the most important features of a free market system is the role that prices play in directing investment to where it can create the most growth and in telling people what they should spend their money on to get the most value for their money, all of the things the Fed is doing is distorting the accuracy of what prices are telling us.

I’m not an expert.  I certainly don’t have a Ph.D. in economics.  But this is scary.  It seems like we are relying on just a few people way too much – especially when they are doing an awful lot of guessing themselves.
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* The Dow and the S&P 500 are at record levels only if you do not adjust for inflation.

Anti-Fracking Fanatics

Those opposed to fracking (mostly Democrats and environmentalists) say it’s not fracking they are against.  They are concerned about it being done properly.  They worry about contamination of groundwater and other environmental impacts.  We need to make sure it is done safely and properly, they say.  We should just hold off until we can make sure it is done right.

In New Zealand, however, the opponents of fracking are more open.  When the Prime Minister, John Key, gave a speech supporting fracking, the Greens were pretty clear in their response.  Their spokesman first said what fracking opponents always say here:

“‘International research and numerous reports in New Zealand have identified that if fracking is done poorly then it can cause serious environmental and health problems.’"

But then they got to nub of the issue:

“‘Even if fracking is done safely, oil and gas from fracking is contributing to climate change and is therefore bad for the environment.’"

That is the point.  That is the real reason the left, and its environmental allies, oppose fracking.  They really don’t care about cheaper energy.  In fact, in some ways they see it as a problem.  If fracking makes energy too cheap, renewables will be too expensive.  Gas may be cleaner than coal or oil, but they really want renewables.  If that requires energy to be a little more expensive, that’s okay.  If energy from renewables makes people a little poorer today, because they have to spend more money on energy, that’s okay, too.  It will make the world better in the long run.  And besides, most of them already have their jobs and their money.   If other people have to sacrifice, it’s for a good cause.
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UPDATE (3/28/13 12:05 pm): Fixed some copying errors in the last paragraph.

Is Ben Bernanke Doing To Us What Angela Merkel Did To Cyprus?

The Euro crisis du jour (or perhaps I should say “Euro crisis des Tages” since Germany seems to be the main player in these crises) has been Cyprus.  Cyprus’s main banks are insolvent because they took money that was deposited by Russians and invested it in Greeks bonds.  Needless to say, that did not go well.  When Greece forced its lenders to take a haircut on its bonds, Cyprus’s banks took huge losses.  To prevent its banks from going bankrupt, Cyprus needed a loan.  But the EU wouldn’t give Cyprus a loan unless Cyprus chipped in some money too.

The first proposal (or at least the first public proposal) was for Cyprus to get the money by imposing a one-time tax on bank accounts: 6.9% on bank accounts up to €100,000 and 9.9% on bank accounts over €100,000.  To say this idea did not go over well in Cyprus is an only hits accounts over €100,000, but will hit them harder, has now been agreed to.

The most interesting thing about the first proposal was that it included a 6.9% tax on bank accounts of up to €100,000, even though bank accounts in Cyprus, as elsewhere in the EU, are insured for €100,000.  In other words, in spite of the insurance, the government was going to take 6.9% of every account of up to €100,000.  “Sorry about your account, Mr. (or Ms.) Depositor,” the government was saying, “but we need money and too bad about the insurance.”

Pretty amazing.  Except that I am not sure how much different this is than what the Federal Reserve has been doing to bank accounts in the United States over the last few years.

When the Federal Reserve initially dropped short term interest rates to near 0%, it was to prevent a depression.  Since then, however, the Fed has kept short term interest rates at near 0% in an effort to get the economy growing at an acceptable rate.  Since July of 2009, when the recession officially ended through February of 2013 (the last month available), the Consumer Price Index – All Urban Consumers – All Items has gone up 7.8%.  During that same period, interest on bank accounts has probably been a total of 1% or 2% (less than that for my money market fund).  In words, even assuming the 2% figure, in the last four years, the Federal Reserve has effectively cut the “real” value of bank accounts in the United States by 5.8%.  And they promise more 0% interest rates to come. 

When he has been asked about this, Chairman Bernanke has said he is doing all he can to get the economy growing.  He understands that it is hard for people with money in bank accounts and those on fixed incomes, but it’s better for everybody to get the economy moving again.*

While I understand Chairman Bernanke’s theory (though the economy hasn’t responded all that well to these policies), over the last almost four years, the reduction in the real value of bank accounts in the United States has been close to the 6.9% more subtle.

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* Also, see Sarah Bloom Raskin, a Federal Reserve Board governor saying much the same thing here.

Was Invading Iraq a Mistake?

In reading one of the many ten-year anniversary pieces on the Iraq war, I found a reference to a YouGov poll in January of this year that said that, in response to the question “Do you think the United States made a mistake sending troops to fight in Iraq in 2003?”, 52% of Americans answered “Yes” while 31% said “No”.  The article I read said “only” 31% said it was not a mistake.  Given how badly the war was conducted before General Petraeus took over in 2007, and given the Bush administration’s failure to defend itself against charges that it lied about WMDs in Iraq (among other things), I’m amazed that the percentage who said the war was not a mistake was that high. 

Harlon Hill, RIP

I am not a football fan anymore.  I gave it up in the 1970s.  Too many deliberate injuries.  People trying to injure guys on the other team so they couldn’t play.  I got tired of it.

But I was a football fan, and a Chicago Bears fan, before that.  My favorite player was Harlon Hill, who passed away last Thursday at the age of 80.  He played wide end (to show you how long ago that was, they don’t have a position called that any more) for the Bears in the 1950s.  He was rookie of the year in 1954 and most valuable player in 1955.  Back in the ‘50s, a team could find players that nobody else knew about.  George Halas found Harlon Hill at Florence State Teachers College in Florence, Alabama.

I don’t remember a whole lot about Harlon Hill.  I was pretty young.  But he was my favorite player, and even today, whenever I hear the number 87, I think of him.

If you can get through the Chicago Tribune’s digital wall, Fred Mitchell has a nice remembrance of Harlon Hill here.  Here is an excerpt:

“In college, Hill was the favorite target of quarterback George Lindsey, who would become an actor and played ‘Goober Pyle’ on the Andy Griffith Show.

Hill said Lindsey's favorite play to call in the huddle was: ‘Harlon, go long.’”

Here’s my Harlon Hill football card:

Phil Rogers: Tear Down the Wrigley Field Scoreboard and Win It All

Phil Rogers gives us another one of those “Cubs-fans-are-sentimental-fools-whose-team-will-never-win-until-they-get-real” columns in Friday’s Chicago Tribune.  First, it was lights.  Then it was more ads.  Now it’s tearing down the centerfield scoreboard and replacing it with a jumbotron.  Here is his reasoning:

“When something in my house is outdated, I generally replace it.

If the Cubs wanted to do that with the 76-year-old center-field scoreboard — yes, the iconic scoreboard — here's what I would say: What took you so long?

… A couple of weeks after President Theo Epstein was hired, here's a quote I used from an unnamed general manager about the changes coming for the organization.

‘I wouldn't look for that old scoreboard to be sitting on top of the center-field bleachers for many more years,’ he said. ‘There's $20 million (per year) sitting up there if they put a giant Jumbotron up.’ …

You know what $20 million a year will buy you in the free-agent market?”

Yes, I know what $20 million a year will buy in the free agent market.  Alfonzo Soriano and a utility infielder to be named later.  The problem with Phil Rogers’ argument (Dave Kaplan makes it, too) is that the Tribune Company and Jim Hendry tried it.  The Cubs had the second or third highest payroll in major league baseball in late 2000s, and what did the fans get?  The Cubs haven’t won a playoff game since 2003.

People like Phil Rogers keep telling us that, if we give up what makes Wrigley Field special, if we give up what makes being a Cubs fan special, if we give up why we care, then the Cubs will have enough money to win.  Well, the Cubs spent the money in 2006 to 2009, and they didn’t win.  Why should we think it will work this time?  And if it doesn’t, where do we go to get our memories back?

Spending Versus Accomplishing

I don’t know if it’s his liberalness (progressivity-?) or his lack of real world experience, but President Obama, like many (most-?) Democrats (and too many Republicans, unfortunately), confuses what government accomplishes with what it spends.  If the sequester, or whatever, cuts the amount government spends, President Obama, and those who think as he does, seem to assume that government will accomplish less.  The idea that good management might be able to reorganize how things are done in order to accomplish the same things, at a lower cost, isn’t something that would occur to him. 

Just as bad, he assumes that, if the government spends more, then it necessarily accomplishes more, which is not true, either.  In fact, it’s not true in any organization, private or public.  And the bigger the organization, the less likely it is to be true, which is why it is so far from true in government.  Except in the world of those who believe that the measurement of accomplishment is spending and that what counts is not what is actually done but what is spent doing it.

The Mistakes of the Iraq War

It is the tenth anniversary of the start of the Iraq war and lots of people are writing their analyses.  I don’t have the time to do a proper review – and others have done it better.  Three of the best may be this one by Robert Kaplan and these two (here and here) by Max Boot.  (I realize it is a little unusual to reference two articles by the same person, but they are different and both include important points.)

I want to mention just one point about how the Iraq war was fought.  But what I am talking about is not what happened in Iraq.  Rather, I am talking about the fighting in the United States about Iraq.  With respect to that fighting, i.e., the argument in the United States over the Iraq war, the Bush administration was, to a large extent, incompetent.  I wrote about this point previously, and what I said then is still true today, if not more so.  Here is what I said (in part):

“[I]n July [of 2010], Karl Rove wrote in The Wall Street Journal* that his biggest mistake in the White House was to not insist to President Bush that they had to respond to Democratic charges that President Bush had lied about Saddam Hussein and WMD. … Of course, all of them [i.e., Democrats] had previously said that Saddam Hussein had WMD, but that did not stop them from later saying, in so many words: ‘Bush lied, people died.’

Mr. Rove notes: ‘At the time, we in the Bush White House discussed responding but decided not to relitigate the past.’

As Mr. Rove how says, this was a mistake.  Actually, it was a huge mistake ….

[I]t was wrong because it weakened the American people’s support for the war in Iraq.  If one side criticizes and the other side does not respond, eventually some people will start to believe what the opposition is saying, no matter how wrong it is.  After all, if you aren’t willing to fight back, some people will believe it is because you think you are wrong. …

[T]he decision to not respond was wrong as a matter of history.  It is not only important to do what is right, it is important to explain why what we did was right – so those who come later will understand why we did what we did. … By not responding to these charges, President Bush let his opponents write the first draft of history.  Sometimes first drafts can be corrected, but it takes time – and sometimes it doesn’t happen.  By not responding to these charges when they were made, the Bush Administration has increased the chances that the history of our involvement in Iraq won’t be written correctly.  And that could lead future generations to make mistakes of their own because they didn’t understand what really happened in Iraq and why.”

This is where we are today.  Because President Bush did not respond to the charge that he lied about Saddam Hussein having weapons of mass destruction (as opposed to being honestly wrong), that charge has become truth to many people.

While all of the mistakes that were made in how the war was fought from 2003 to 2006 are the main reason for the way the American people think about the Iraq war today, the decision of the Bush administration to not respond to the claims that it lied about Saddam’s WMD has contributed to that thinking.  It was a terrible mistake at the time.  And its consequences will last for quite a while.

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*Karl Rove, “My Biggest Mistake in the White House,” The Wall Street Journal, July 15, 2010.

Iran Will Get Nuclear Weapons (If They Want Them) – In Spite of What President Obama Says

Earlier this month Vice President Biden said that President Obama is “not bluffing” when it comes to stopping Iran from getting nuclear weapons.  Secretary of State John Kerry said, “Lines have been drawn before and they’ve been passed.  That’s why the president has been so definitive this time.” 

So why do I think Iran will get nuclear weapons?  Because I do not think we can stop them.  And that’s mainly because by the time we decide we need to act, it will be too late.  Either Iran will surprise us and already have a nuclear weapon before we realize it or we will wait so long it will be too late to act even if we know about it ahead of time.  Or most likely, some of both,

Olli Heinonen, a Finn who retired as deputy director-general of the International Atomic Energy Agency (“IAEA”) in 2010, said in an interview with David Feith of The Wall Street Journal on March 2, 2013, that "if you go back to the nuclear programs which have been revealed {elsewhere}, they all came with a surprise.” 

There are at least two scenarios on how a surprise (or partial surprise) could happen.  Olli Heinonen explains one of them.  Though it is not a complete surprise, it would have much of the same effect:

“[I]t could go the North Korea route – defined by Mr. Heinonen as deciding ‘Enough is enough, to heck with this, we'll build a nuclear weapon’ – in ‘a month or two,’ he says.  The precise timing would depend on how (and how well) Iranian engineers go about enriching their uranium stocks to weapons-grade purity. But in any case, Mr. Heinonen notes, Iran's breakout would likely outpace the ability of the ‘international community’ to respond.

First, IAEA inspectors would have to detect the breakout.  This could take up to two weeks because they visit Iran's major uranium-enrichment facility about 24 times a year.  (Roughly half of the visits are announced, meaning inspectors give the Iranians 10 days' notice, and the rest are unannounced, meaning about two hours' notice at any time of day.)  Once inside, inspectors would quickly recognize from the enrichment machinery that Iran was dashing to a bomb, says Mr. Heinonen, but that would hardly be the end of the story.

The inspectors would formally alert the IAEA board, which takes ‘a few days' time.’  The board would meet and pass a resolution (which ‘needs a few days’) and then engage the United Nations Security Council (‘also not an overnight decision’).  ‘In reality,’ he says, ‘one month is gone.  Well, during that one month [Iran] may have achieved their goal, at least to have enough high-enriched uranium for a nuclear weapon.  What next?’  Iran would have become the world's ninth confirmed nuclear state.”

The other scenario is the full surprise.  It assumes that Iran has secret facilities, and as Mr. Heinonen says: “If there is no undeclared installation [in Iran] today . . . it will be the first time in 20 years that Iran doesn't have one.”

This scenario could go like this:  Iran will continue to say that they do not want, and do not have a program for, nuclear weapons.  They will maintain they are enriching uranium only for research and energy, not for weapons.  And they will keep saying this until just before they announce that they have a nuclear weapon.  But when they announce they have a nuclear weapon, they will not admit that they were lying when they said they were not developing nuclear weapons.  Rather they will say that they were forced into developing a nuclear weapon to protect themselves against the West.   The sanctions – and threats of attack – forced them to develop a nuclear weapon, even though they did not want one.

But why won’t we know about it?  Because it is hard to know for sure.  Expecting our intelligence agencies to tell us exactly when Iran will get nuclear weapons is expecting too much of them.  They have not been able to get things like that right in the past; why do we think they can do it now?*

Stephen Carter writes about Gordon Corera’s new book on the British Secret Intelligence Service, MI6:

“As Corera points out, the enemy of good intelligence work is often time. It can take months or years to determine whether a bit of information is even true -- longer still to figure out what it means. The faster the spies have to work, the greater the likelihood of error.”

After everybody’s intelligence agencies got it wrong about whether Iraq had weapons of mass destruction, the CIA, et al., will not want to make the same mistake again.  Instead of rushing, this time they may hesitate too much.  They will wait because they are not sure. 

Just as there our intelligence agencies will hesitate in telling our leaders about the status of Iran’s nuclear program, our leaders will hesitate in deciding to act.  Saying we will not allow Iran to get nuclear weapons is easy.  Actually stopping them is hard.  It is so hard, in fact, and so dangerous, that the ultimate decision to do something will keep getting put off (as it has been).  By the time the intelligence agencies tell our leaders it is time to act and by the time our leaders decide to act, it will be too late, if it is not too late already. 

Iran will get nuclear weapons if they want them.  And it is hard to see why they would not want them.

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* For a post expanding a little on this point, see here.

 

Doesn’t Look Like President Obama and Congressional Republicans Will Be Agreeing On Much of Anything

Senator Mike Lee (R-Utah) told Greta Van Susteren about the President’s visit with Republicans on Capitol Hill yesterday:

“[O]ne of my colleagues stood up and said, ‘You know, Mr. President, it’s not all that helpful to have you publicly questioning our motives, publicly accusing us of wanting to eviscerate Medicaid, for example, simply because we want to call for reform or block grants.’ …

[The President’s responded:] ‘I don’t speak nearly as badly about you as some of you do about me.’”

Not what you would call a magnanimous response. 

(Thanks to James Taranto of “Best of the Web Today” for the pointer.)