I read Investors Business Daily (IBD) daily because it satisfies me that their system works more perfectly than any I have ever found for the single purpose of picking stocks. That’s not to say that it works perfectly 100% of the time. Nor is it to say that other people’s systems are not equally, and perhaps more, effective. The system works for me by ordering the chaotic world enough that I can glimpse, if only darkly in a mirror, the future. This allowed me to get out of the stock market two weeks before the crash that took the market from 14,000 down to 6,000. This insight saved me a lot of money and made me a lifetime advocate for the paper.
I don’t regularly read the editorial page of the Investors Business Daily, because it’s far too committed to the right’s point of view to the exclusion of the left’s point of view. I am party-neutral on most debates in Washington. I am extraordinarily conservative when it comes to fiscal policies; and extraordinarily liberal when it comes to social policies. Dennis Miller’s complaint about liberal media bias—he said that “Contrariness is creativity to the untalented”—holds true of both sides in the debate between liberals and conservatives. But Miller’s comment doesn’t note how much truth there is on both sides of such debates. Barack Obama does have a point about the American healthcare system. So does Rush Limbaugh. But having a point is not the same as having the whole truth.
My problem is not with what Obama and the Democrats know as they are trying to fix the healthcare system. My problem is what they don’t know. I suspect that Obama and his advisors—it is famously reported that he has very few people have private-sector experience either in his Cabinet or in his kitchen cabinet of czars—do not know enough to follow this article that appeared in IBD yesterday by Alan Reynolds and entitled “Shilling For Shiller in the Permabear Press.”
Problems with the Permabear Article
The article has a debatable premise: that the “Permabear Press” has been talking down the markets for a long time. This, in the writer’s opinion makes them “Permabears.” Now they are shilling for a Yale economist name Robert Schiller. All of the premises of this article are debatable. Someone might note, for instance, the role of the indifference of the press to the overblown prices of the housing markets in the years leading to the crash. This would make the case that they should be portrayed as a “Permabull Press.” Reynolds makes no mention of this.
That’s fine. His article is published on the editorial page of IBD. It’s up to the individual to make up his or her own mind, and this is done by gathering as many different points of view on the subject at hand and weighing your own opinion for yourself. That’s the way it has always been done. Hopefully, that’s the way it always will be.
But the article has a lot of facts in it, as well. And it is not true that people have an infinite ability to organize facts according to their own whims. They can even be absolutely right or absolutely wrong. For instance, take the scientific fact that human beings need air to breathe. This is not up to human beings. It’s just a fact. Of course, people used to believe that the earth was at the center of the universe, but we got over that. Science has what they called in graduate school a teleology towards the truth.
Economists deal with facts, as well, but economists are dealing with a human element in their assessment of nature, and any time there is a human element in your assessment of facts there is going to be a lot more room for debate. They still deal with facts, but such facts are not subject to such absolute standards of right and wrong. But this does not mean that they can’t be more right or more wrong. Once again, it’s up to us to decide for ourselves which side we fall on, or if we fall on any side at all.
The World Outside Your Mind
In Reynold’s article, Shiller has given us a graph that warns that there is a correlation between company earnings and stock prices. Reynolds responds with a graph that shows the correlation between variations in stock prices to variations in interest rates. It’s up to the reader to decide.
But in this case, there are some facts that are made in reference to a world that exist outside of the individual human’s ability to grasp all at once. In those instances, we have a choice. We can look to the individual mind for the metaphysical resources by and through which we organize such facts. This is the preferred method of academics. But this is not the only way. For instance, such an approach makes no sense in my role as a stock investor. Instead, I rely on extra-human statistical measures to try to make sense of the future of stock prices. Individuals who need to assess their position in the stock market universe need to assess something that their minds never will be able to fully grasp. They are thrown back onto competing statistical models. And the more statistical models to have, the better they will be able to grasp what the future has in store. Unlike the academic process of thinking about stocks, which ends once you realize that your mind is coextensive with the possibilities of thought itself, the individual can never have enough information to be absolutely sure that they know what the future will bring.
In that sense, the best models for judging future stock prices is not like politics, where you have a party on the right the party on the left and you must choose between two competing parties. In the environment of politics, both parties will disappoint the purists among them when they govern, for governing is usually done in an environment of compromise, not pure idealism.
P-E Ratios
Moreover, the models individual stock picker are working with is a scientific vocabulary that continues to make sense outside of any individual’s ability to control the referent of the vocabulary. For instance, Reynolds’ article has the following paragraph in it:
[His graph] shows that P-E ratios are not greatly affected by psychology, as Shiller believes, but rather by interest rates. This is easily shown by turning the P-E ratio upside down, which produces an earnings-price ratio, sometimes called the earnings yield. Clearly, the trailing P-E ratio tracks the yield on 10-year Treasury notes quite closely.
There is no debate about what a P-E ratio is. For those of you who don’t know, it is the ratio between Price of a stock and Earnings of a stock. There’s all sorts of meaning that you can draw from looking at P-E ratios, however there is no necessity of knowing what the P-E ratio is or how much valuable information you can obtain from understanding all the ins-and-outs of P-E ratios. Just because you don’t know it, doesn’t mean it’s not true. It just means that you don’t know it. And vice versa: just because you know all there is to know about P-E ratios having gotten your PhD in P-E ratio theory, doesn’t mean you know all that ever will be known about P-E ratios. To think otherwise would be foolish.
Reader Response to the Permabear Article
There are a few things that pop into my head when confronted with scientific fact of P-E ratios:
1) You can declare yourself a god who knows everything there is to know about the subject of P-E ratios, as the Oxford don and translator of Plato of whom it was written:
My name is Benjamin Jowett.
I’m a Master of Baloil College.
Whatever is knowledge, I know it,
And what I don’t know isn’t knowledge.
That may be satisfying to you, but you are not alone in the universe. The P-E ratio may hold more information within it than you know, and to deny this would redound to your discredit. This is why only fools think they know everything.
2) You can learn what a P-E ratio is. Only after you know what a P-E ratio is can you evaluate what the article is telling you about P-E ratios. And the more you know, the finer distinctions you will be able to make about P-E ratios. This is, in my opinion, the best practice.
3) You can still read the article without understanding what P-E ratios are, because you can still get the gist of what the article is saying. This will sort of work, but you will not really be able to evaluate what the article is telling you about P-E ratios. You will either make an uniformed decision based on other principles (like which party you like and which party you don’t; whether you trust the economist based on other things he’s written, etc.) or you will refrain from having an opinion at all.
4) You can put the article down as too complicated for you. That’s fine. People only have a limited amount of time in their days and reading dry editorials featuring arcane facts about P-E ratios may not be for them.
Obama’s Response
My problem with the Obama Administration is that I am starting to suspect that they don’t know anything about P-E ratios but are trying to do things that will drastically affect stock prices and so P-E ratios as if the decisions they are making don’t drastically affect the lives of all Americans and as if there were no consequences for running up huge debts or drastically changing the health care that most of us are satisfied with.
While it is true that politicians have to make hard choices, this administration is leading the country as if things like P-E ratios, which will be radically affected by the administration’s policies, don’t matter to the American people because Obama and his people haven’t heard of them or at least haven’t taken such drastic changes into account. This administration is behaving just like Benjamin Jowett, who simply disregarded anything he didn’t already know. This is why Obama dismisses Republican points as nothing more than ‘talking points’ and not serious points and weighty points to be carefully weighed and considered. It seems to me that if it doesn’t occur to them, they can only be ‘talking points,’ which in recent Obama speeches seems to have taken on the meaning of ‘obstructionist obstacles to real change.’
Politics The World Over
I suspect that it’s the product of Americans placing too much emphasis on politics. Politics is, in one sense, an appeal to our deeper ideals. This, surely, is why Obama was elected. But running a campaign is different than governing. Like Clinton before him, Obama is playing off the legacy of the last president, which he will correct. George W. Bush made some blunders, but not as many as Obama says. This is why Obama is duplicating so many of the policies of W.
An aside here: This was one of the things I learned from a textbook in college. My history professor assigned The American Political Tradition: And the Men Who Made it
That is the nature of politics.
The Realities of the Obama Policies
I don’t take partisan sides in public policy issues. Instead, I try to take a philosophical perspective in which many sides on an issue can be weighed. Sometimes (as with issues of life and death: abortion, capital punishment) I refrain from judgment, because I can see both sides and cannot make a clear and compelling moral distinction out of the facts. That doesn’t mean that I disdain political action. But it does mean that I am suspicious of hyper-partisans who insist that only their position makes sense and that their opponents positions render them so contemptible that they don’t even have to be engaged (think about the Obama administration towards Fox News). That may satisfy the Democratic base, but the fact of Fox News’ ascendancy are still there. Rhetoric does not change scientific facts.
My feeling has always been that Obama places too much emphasis on the power of rhetoric alone to effect change. This is why he stands above the fray, allowing Harry Reid and Nancy Pelosi to craft the details of his healthcare bills, while he stands back and surveys things from on high. This is exactly the sort of philosophical position I take on issues. But I am not a leader, and leadership requires more than such a lofty position. Leaders have to make hard choices, sometimes from less than optimal options. By standing aloof from such day-to-day issues like “process” (see the Fox News interview he gave yesterday) and by appealing to his idealistic base while disdaining Fox News and the Republicans, he is appealing to only to his base and only on the basis of the idealism.
Politicians appeal to us for our ideals, but once they are in office they govern on mainstream principles. In the case of the Obama Administration, Obama is pursuing his idealistic agenda. “Damn the torpedoes, full speed ahead.” But they are continuing to go to the edges of the law to effect their policies. Obama campaigned on open government; the reality of Obama government is that deals have been made behind closed doors. Obama campaigned against the use of a simple majority to pass things through a Senate which requires 60 votes; now he is governing with the use of reconciliation process that only requires 51 votes to pass a measure. If that’s not enough, Nancy Pelosi has decided she does not have enough votes to pass the Health Care bill, and so she is relying on the Slaughter Rule (ah, the ironies of language) to pass the bill without a floor vote at all. Obama is so desperate to have his health care bill pass that he is not overly concerned that they will be using the Slaughter Rule to pass health care.
Obama is challenging the system, even the people themselves, in a rare display of courage or cowardice (pick one). This is all being done not just to change the health care system, but to transfer wealth from private insurers to the public by making health care an entitlement. As Mark Steyn said this week on the radio, the Democrats must be looking at the longer term picture. They see short-term losses, but long-term gains as they see political gains from a shift from a center-right country, which we are today, to a center-left country, which we will be ever immediately after Obama signs this bill into law. In that sense, he will fulfill his promise to fulfill his goal of transforming the nation in the way that Ronald Reagan transformed it 30 years ago.
The Cost of Such Single-Mindedness
I suspect that this will work. For one thing, the Republicans, who suffered a crushing defeat last year, are not yet ready to lead. They are still gathering their forces together and opposing health care. This was my point in pointing out the differences between 1994 and 2010 last year. But leadership requires more than the voice of opposition. Leadership requires shifting out of mindless opposition mode into action mode, and I think the conservative cause has been dealt a far more serious blow by the actions of complacent congressmen and senators than they yet know.
I fear that the greatest cost of Obama’s idealism will be the cost of having people’s faith in government itself so shaken that it will be a generation (if that) before a leader on the right or the left will be able to capture the people’s imagination again. I fear that they may turn towards the Republicans en masse in the short run. But in the long run they will turn against politicians altogether, feeling that they are all liars and cheats who think more of the power of their own rhetoric to appeal to their own base than any scientific facts that can be brought into this or any argument and by which arguments have always been expanded beyond the simple, a priori premises.
As for the readers of the IBD, they will have to live with the President’s indifference to the scientific real world world of P-E ratios and deficit spending, as America goes quickly the way of Greece.