Why Oh Why Can't We Have a Better Press Corps? (National Review Edition)

Larry Kudlow writes:

Kudlow's Money Politic$ on National Review Online: Mustard Seeds [Larry Kudlow]: Many Wall Street analysts are forecasting a steep 3 to 4 percent Q4 contraction. But they are not factoring in the roughly $200 billion dollar drop in consumer energy expenses that is accruing from the collapse in oil and gasoline prices. This huge energy tax cut effect will be a big booster for consumers and businesses. Not only will it benefit consumer purchasing power, it will also improve the profits picture, and as a result, the stock market...

But the stock market is a forward-looking animal. Unless you think investors are really stupid, the effect of falling oil prices on profits and future dividends has already been incorporated into stock prices--it has just been overwhelmed by the bad news about the financial crisis.

At some point predictions that the stock market is about to rise are going to be true. But if they are true now, it is not because "Wall Street analysts are forecasting a steep 3 to 4 percent Q4 contraction. But they are not factoring in the roughly $200 billion dollar drop in consumer energy expenses that is accruing..."

Comments

[AndrewBW]

Why oh why can't we have a better Larry Kudlow?

[Doctor Jay]

The stock market is most certainly forward-looking. It was also forward-looking a year ago, and all it saw was blue skies and green lights.

All that looking is done by human beings. Who are all subject to confirmation bias, and a host of other perceptual traps that are both essential to living and hamper one greatly when doing things that require strict disinterest and rationality. Things such as science or investing.

So the question is not whether you think investors are stupid or smart, it's what factors do you think are most affecting their decisions and valuations of stocks at the moment. And if you're an investor, you have to be asking what your own valuation is, and what the major factors are.

I'm skeptical that "this energy tax cut will be a big booster" because I don't think oil costs are as important to lots of sectors as Kudlow seems to think. I think it will provide some relief, but the primary thing on consumers' minds is all the layoffs in the news, and the primary thing in investors minds is the potential for more bankruptcies in the finance sector and the difficulties posed by credit problems.

Now if an analyst didn't figure in the energy price drop into their predictions, they would be worthy of being called stupid.

[pgl]

Isn't this the same Larry Kudlow who said over 5 years ago that invading Iraq would lead to oil prices being $12 a barrel as Iraq would start producing 12 million barrels per day? And we thought George Will was bat-shit insane!

[S0C7]

Larry is a clown.
Here is my analogy on financial "experts".
Imagine you meet your fantasy football nemisis on the street and starting talking shop..."Man, Kurt Warner has been on fire of late!", "Yeah, what is up with Donovan McNabb though?" "No idea, but I am glad I went WR 2 and 3 in the draft!" "You said it bro, I have weak WRs and my main RB, Brian Westbrook is hot or cold, and cold of late!"
Then you walk into a bar with NFL games on the teevees. "Wow, what are these guys doing? What is this game?", he asks. He has no clue what real football is...he only knows the stats for fantasy football. Well, Larry is that guy about to walk into the bar. He can do all the tech analysis he wants. Maybe the Dow chart does have a similar pattern to 1939...but so what? Mustard seeds...energy tax cut...he is all stats and numbers and probably has no clue what the Joe Six Pack economy is really like.

[Neal]

Mr Kudlow (and others) still do not get how much the real estate bubble and "financial innovation" goosed the economy. $200B is only 1-1/2 percent of the US economy. Where is the other 18-20% going to come from?

[Strat]

So. The reason why the oil price is dropping is because economic activity has fallen off a cliff. When the oil price drop turns the recession around the oil price will rise, because then there will be no recession. But the oil price rise will cause a recession. But the recession will drive the oil price down, so don't worry. The worse the recession, the faster the oil price drops, and the more glorious the boom we have to look forward to. Do I understand the whole thing now? How long till my head explodes?

[howard]

prof, as a longstanding fan of gene epstein, you should be aware that (afaik), the first proponent of the "falling oil prices will save us all" line was epstein in barron's 3 or 4 weeks ago. my mother happened to read it before i did and she was telling me about this silly article in barron's and then i got my issue, saw the "silly" article was by epstein, and emailed her "here's the explanation."

what kudlow and epstein aren't factoring in is that this isn't a stimulus: the median household was having a terrible problem paying $4/gallon for gas. the fallback to $2.50/gallon merely puts households where they were: in crummy shape. they didn't know where they were going to find the money to pay for the gas, so they don't suddenly have it to spend in other ways.

[Neal]

It's not just that they are back where they were at $2.50/gallon---their present condition is much worse than 2 years ago.

[Ken Houghton]

You go to Economics with the WooWoo graduate you have...

[Michael Turner]

The oil market is also a forward-looking animal, and what it's saying is that demand will drop -- because there's a recession. When OPEC says it's not going to boost production and the price still drops, that's a screaming recession signal. Gasoline consumption in the U.S. has been falling, at an increasing rate, for most of the year. I think the last time gasoline consumption dropped at all was only very briefly, around the time of the first Gulf War.

Unless (I suppose) you believe the price run-up was because there was an oil bubble. But when neither the CFTC nor a whole host of actual economists can figure out how that could have been happening, it's probably because it wasn't.

Still, there's no use reasoning with Kudlow and his ilk. I have a friend who doubted every bubble I pointed out in recent years (stocks and property in China, and in the U.S.) When these started deflating, he pointed out oil as a bubble, but couldn't understand the argument that it must have been mainly supply and demand in action, unless someone could find hoarding activity. Yes, the one time he's willing to say that some crazy price behavior WAS a bubble is the one time in recent years where you could say it almost certainly wasn't a bubble.

[Tomas]

I find it fascinating that this is now the second rightwing "economists" article Prof. Delong puts up where the writer seems to argue: people are stupid, thats why markets work huzzah! without even a token nod to the odd nature of this theory.

[pgl]

"The reason why the oil price is dropping is because economic activity has fallen off a cliff."

Strat - are you suggesting that Kudlow does not know the difference between a shift of the demand curve v. a movement along a demand curve. Well, golly gee - he doesn't know the difference after all. But that's what you get when you "learn" economics from the National Review University!

[pgl]

"The reason why the oil price is dropping is because economic activity has fallen off a cliff."

Strat - are you suggesting that Kudlow does not know the difference between a shift of the demand curve v. a movement along a demand curve. Well, golly gee - he doesn't know the difference after all. But that's what you get when you "learn" economics from the National Review University!

[kharris]

There is a suggestion in a couple of the comments that if the Kud knew more about economics, it might make a difference in what he says about economics. I believe that is not the case. What he has done, from a pundit-tactical point of view, is to lay himself open to being utterly wrong in the very short term. That strongly suggests he doesn't mind being wrong. My guess is that, after being wrong for the "right" reason so many times, he has learned that there is no cost. He began his public career as a guy who was wrong for the "right" reasons, and is where he is because of that. He has no experience putting the right answer ahead of the "right" reason, and changing career paths now probably just doesn't make any sense to him.

[nanute]

I'm waiting for Larry to tell us that since Ford, Chrysler and GM won't be producing any more cars, demand for oil should decline further!