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The Cyclical Bull Within the Secular Bear


Yes, we've been given a reprieve. But just wait till next year.

The Cyclical Bull Within the Secular Bear

In today's 2 major financial print-media outlets, Wall Street Journal and Financial Times, you have a remarkable contrast between the academic versus the street-smart way of understanding the current debate over the Geithner banking plan (PPIP) and the core banking issue: liquidity or solvency. In the process of understanding the debate, investors can gain a better understanding of the cyclical bull within the secular bear that we're currently experiencing.

Both articles are critical of PPIP; one makes its case by accepting the market-efficiency argument, while the other provides an inside-game view of how things actually work in the financial markets - the academic versus the street-smart version, if you will.

In the academic corner, we have Professor Jeffrey Sachs. In today's Financial Times, Mr. Sachs makes, in effect, the same failed argument that fellow economist, Paul Krugman, made a few days ago. In Sachs' article, Obama's Bank Plan Could Rob the Taxpayer, the good professor starts off his argument with the same efficient market, dogmatic one made by Krugman:

"The Geithner-Summers plan, officially called the public/private investment programme is a thinly veiled attempt to transfer up to hundreds of billions of dollars of US taxpayer funds to the commercial banks, by buying toxic assets from the banks at far above their market value." (Emphasis added.)

There are 2 fundamental assumptions in the Sachs opening statement. The first is the implicit view that only the market knows what the true value of an asset is. This is the same tired and antiquated efficient-market principle that should have died a long time ago when the behavioral-finance neutron bombed that hypothesis, and the repeated financial collapses originating from quants with Ivy League Ph.D.s -- LTCM and the current credit crisis being 2 standout examples -- was made real.

As with Krugman, Professor Sachs then goes on to support his argument with the same bizzaro logic, using math that can only be described as incredibly naïve. In the Sachs article his math assumes both insider self-interested price manipulation and stupidity (most notably on the part of the co-owner of the assets purchased - the US Treasury).

Finally, and most egregiously, he does the same as Krugman and doesn't take into account the positive wealth effects that will almost certainly occur, as trillions of dollars are pumped into the global economy and the forces of pro cyclicality begin to work their market magic. Apparently, both economists have a profound distain for Soros' reflexivity. Moreover -- and more directly to the realm of the real economy -- Sachs seems to suggest that there's no interactive dynamic between asset classes and the broader economy!

Now let's contrast this top-down, academic version of how the economy and market function with that of someone deep in the trenches: former hedge fund manager Andy Kessler.
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Positions in EEM, EWZ, and FXI.
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