THE DAILY RECKONING, WEDNESDAY NOV 26, 2008

The Turkey's Revenge Paris, France Wednesday, November 26, 2008 "You can understand how fraudulent most economic analysis is," Nassim explained, "just by looking the life of the turkey. The animal is fed for 1000 days...and then it is killed. So, if you plotted out the turkey's life on a chart, it would look great for 1,000 days...each day, the food arrived reliably, and each day, the turkey gained weight. The turkeys would look around and say they were enjoying growth and a bull market. Momentum investors would see it as an opportunity. The quants would run linear regressions on the data and prove that the risk was minimal. " Ben Bernanke would describe the turkey's life - with no setbacks - as the product of a "great moderation." Turkey stockbrokers would assure their clients that nothing had ever gone wrong in the turkey's life. Turkey econometricians and theorists would come up with explanations for why the turkeys' growth would continue forever and they'd pat each other on the back for having finally mastered the "turkey cycle." Turkey politicians would run for re-election on the grounds that they had helped create a better world. And turkey economists would project further weight gains...until the turkey was the size of a hippopotamus Then, come Thanksgiving, and all of a sudden, something goes wrong. Alas, all the turkeys' theories, models, and conceits were for the birds. "Rare events can't be modeled," Nassim continued. "Because they are too rare. You can't get a statistically reliable sample. Alan Greenspan recently explained that he 'had never seen anything like this before.' Well, of course he had never seen it before. It never happened before. "Because these events are so rare, they are also completely unpredictable...and usually much worse than you can expect. Like Thanksgiving Day for the turkey." The turkeys are getting the axe...but they're having some revenge: Americans are getting the axe too. Unemployment is rising sharply...and tomorrow, when Americans sit down to their turkey dinners, they will be dining in houses worth about 18% less than they were worth a year ago. Not only are their houses worth less...their values are falling faster and faster. There's no sign of a bottom to the housing market. In some areas - Los Angeles, Miami, San Diego, and San Francisco - the loss in housing wealth already exceeds 26% from a year earlier. But don't worry, dear reader. Houses are not dot.coms. And they're not turkeys. They won't go to zero. And they won't disappear. Besides, they were never financial assets in the first place. They're just places to live. If you're happy with your house...you don't care what its price is. On the other hand, if you're not happy with your house, this is the time to start looking around. Our guess is that house prices will go down another 20-30%. Then, you will be able to get houses at very reasonable prices.. Unless you want to live in Detroit - where you'll be able to get a house at a remarkable price. Meanwhile, the economy itself is sinking too. GDP faded in the 3rd quarter - down 0.5%. Most likely, the U.S. economy will begin walking backwards faster too. Which means...more businesses will fail...more people will be out of work...and those people with any money in their pockets will be very careful about how they spend it... ...which will, of course, make things worse. All this is a natural, normal response to a credit bubble. It gets bigger and bigger - and then it blows up. Loans are made...and then they are collected. Mistakes are made...and then they are corrected. People do stupid things...and then they pay for them. People go mad on the way up...then, they go mad again on the way down. What could be simpler? But if you think the feds are going to stand still and let something natural happen, you have not been reading the papers. They're "pulling out all the stops" to try to prevent the correction. More below... *** So far, the feds' efforts have been futile. But we have little doubt that they will get the hang of it eventually. If there is one thing the feds can do it is inflate the money supply. Ben Bernanke stakes his reputation on it. And here is Thomas L. Friedman explaining what is needed: "...a massive stimulus program to improve infrastructure and create jobs, a broad-based homeowner initiative to limit foreclosures and stabilize housing prices, and therefore mortgage assets, more capital for bank balance sheets, and most importantly, a huge injection of optimism and confidence..." Friedman is the voice of the masses. But the intellectuals agree. Bloomberg reports: "'You want to do everything you can when you're facing the threat of a deflationary breakdown of the economy,' says Michael Feroli, a former Fed official who is now an economist at JPMorgan Chase & Co. in New York. He sees the central bank cutting the overnight lending rate to zero in January and holding it there throughout the year." "Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson are being forced to pull out the stops because the extraordinary actions they've taken so far have failed to gain much traction. Credit markets are collapsing, stock prices are plunging and the world economy is sinking into a recession." "The biggest mistake Obama could make," says Yale economist Jeffrey Garten, "is thinking this problem is smaller than it is. On the other hand, there is far less danger in over-estimating what will be necessary to solve it." Yeah...go ahead and err on this side now.... Why not? You erred on the other side. That is about the depth and breadth of thinking on the issue - at least from the people who never understood what the problem was...and now offer to solve it. And it was to one of these same hacks whom Obama has turned for his Secretary of the Treasury - Timothy Geithner. Here is another Hank Paulson. Unlike Hank, he did not work on Wall Street. Instead, he was supposed to be keeping an eye on Wall Street - as head of the New York Fed. "He was in the room," when all the bailouts and busts happened, said one Wall Street pro. AIG, Bear, Lehman, Citigroup - he was in on them all. And he was at least peeping through a keyhole when Wall Street was enjoying its wild party. He saw the deals go down...the leveraged debt...the private equity buyouts...the subprime razzle-dazzle...the quants...the bonuses. We don't recall a single word of warning. But then, he's a young guy...maybe he's learned something. But we have a pretty strong hunch he'll be at the Treasury Department not to further his education...but to play his role in the developing tragedy. He's meant to try to stop the correction. Rather than examine his lines carefully to see if they really make sense...he'll speak the speech given him. "Stimulus," he will say. "Protect jobs...save homes...avoid financial meltdown." he has heard them before. He will say them again. And why not? Almost everyone wants to hear them. They all want bailout. Almost everyone wants to be saved. Almost everyone wants to duck the bill collector...and stop the hangman. We all have to play our roles, dear reader. We are all turkeys...waiting for the axe.