The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

The “Flaw”

Former Fed chairman Alan Greenspan confessed in testimony before Congress after the 2008 crash:  “I found a flaw in the structure of how the world works.”

At least he had the courage to admit it, although he should have said “a flaw in my theory….”

On July 29, Dr. Greenspan warned on CNBC that the 9% per year growth in entitlements since 1965 will eventually lead to a crisis. He is so correct. It was the big growth in entitlements of retired workers that bankrupted GM. It was the big growth in governmental pensions in Greece that has brought the country to bankruptcy and made pensions the biggest obstacle to a solution during the past 3 years.

The problem is always gutless politicians who don’t have the courage to tackle such a serious problem because they might not get reelected.

Will we hear a similar admission from former fed chair Ben Bernanke for unleashing the biggest credit creation in the history of mankind, at least up to that time. He started what is now called “quantitative easing.” That used to be called “money printing” but they don’t print it any more. Now it’s done by computers. We call it “cyber-money.” It’s so much more efficient…and faster.

I remember when Congressman Ron Paul took us on a tour through the Bureau of Engraving in 1979, where they print US currency. The employee proudly stated, “we have the fastest printing presses in the world, Heidelberg, from Germany.” He didn’t realize that this was very humorous. We all laughed, remembering the Germany hyperinflation.

Yes, economists have found a lot of flaws in their thinking over the centuries, unfortunately only after the flaw has caused misery, poverty, crises, etc. for hundreds of millions of people.

In the stock market, some years ago the hottest new theory was the “Efficient Market Hypothesis (EMH).” This seemed to have been version 2 of the “Random Walk” that stated that no one can outperform the market over the long term.

EMH took it further and stated that all market knowledge about an investment is already reflected in today’s price and that therefore, no one can outperform.

The defect of this theory is that it forgets an individual’s ability to think, analyze, and project into the future. No one can know the future, and therefore the interpretation of facts is different from one analyst to another. Knowledge about what is today is not valuable if you don’t think about what may happen in the future. And no one can “know” the future, but we can speculate on it based on experience and analysis. If all the interpretations were the same, there would only by buyers, or sellers, for the same stock.

You see, economist may “know” a lot because they are so over-educated, but they analyze very little. Last year they predicted almost uniformly a strong US economy in 2015. We forecast “at least one quarter of negative GDP growth and skirting recession.” That was the opposite, but so far we are right, they were wrong. The first quarter had negative growth.

They forecasted up to 15% corporate earnings growth in 2015. We forecasted a decline in earnings. So far, the first quarter had negative earnings growth, and the second quarter is now expected a decline as well.

You see, there is a big difference between being intelligent and being smart. The EMH would have said that the prospects for 2015 should have been well known because everyone had the same facts.