Thursday, February 07, 2008

More Market Populism on CNBC: Jim Cramer & Doug Dachille

This morning's CNBC Squawkbox program featured populist market commentator Jim Cramer as guest host. As is now typical, Cramer used his temporary platform to bash the Fed, Treasury Secretary Henry Paulson, and for good measure, economist Brian Wesbury.

For a brief segment, First Principles Capital Management debt instrument manager Doug Dachille also joined the conversation. A video clip of this segment can be seen here, at least for today, for free, on CNBC's website:

http://www.cnbc.com/id/15840232?video=641887391

What struck me most about Cramer's comments was his unfailingly populist, pseudo-working-class focus in his diagnosis of the economy and financial markets conditions, and prescriptions for their condition.

Suffice to say, in Cramer's world, the economy is in near-Depression straits, financial markets are just inches away from meltdown, and the 'working poor' need forgiveness and bailouts.

For example, Cramer believes that we need to do whatever possible to reverse the recent trends in housing price declines. Nevermind that for going on four years, pundits have decried the rise in housing prices as unsustainable, unwarranted, and economically unhealthy. Affordability became a real concern at the peak of housing prices.

But Cramer says they need to be reflated. His big idea? Government intervention, of course!

He wants Federal mortgage agency guarantees expanded, particularly at the FHA. Additionally, he calls for a Fed rescue- read 'another bailout'- of instrument insurers, i.e., MBIA, AMBAC, et.al.

Along the way, Cramer predictably bashes the Fed, Bernanke and Paulson. He rails against the Governors, demanding lower rates and mortgage rate actions to save 'homeowners hanging by a thread.'

Paradoxically, though, in another typical Cramer behavior, he simultaneously acknowledges that as much as 25% of delinquent or defaulting mortgages were taken by speculators. He doesn't mention the other major recent finding- that fraudsters frequently scammed lenders for cash ostensibly going to buy homes.

Then Cramer launched into his recession jag. First, he ticked off retail softness, as recent and current retail sales reports have shown weaker-than-expected consumer spending. Then Dachille chimed in, going over the top and claiming there is significant joblessness, and jobless people don't spend money at retailers.

What's interesting here is that only yesterday, on Larry Kudlow's show, the most negative of his guests admitted that recent wages data reflected reduced hours worked, not actual layoffs. It was generally agreed that, while weak, GDP growth was remaining non-negative, as were incomes.

So if Dachille is a debt maven, and he is convincing with his knowledge of fixed income spreads, evidently that proficiency doesn't extend, for him, to reading recent macroeconomic reports.

Picking up on Dachille's mistaken comment, Cramer weighed in and smeared Brian Wesbury in a brief aside, as if merely saying it discredits Wesbury's careful, sensible analysis that we are not in a recession. For more details on that, see
this recent post, which includes a link to Wesbury's recent Wall Street Journal piece on the economy.

Cramer then declares,

"We're in the worst deflationary slump since the 1930s."

He continues to deride the Fed, claiming they want to punish borrowers and are out of touch with reality. Without citing any data, Cramer blithely disregards yesterday's Fed official's comments on looming inflationary pressures, and declares that we are, in fact, in the midst of a deflation.

For those of us trained in economics, we can observe that Cramer has confused inflation, which is a monetary phenomenon involving the loss of buying power of a currency, with liquidity, or the availability of capital.

An economy can experience deflation and a loss of liquidity. It can also experience inflation and adequate liquidity. But an economy can also experience inflation without any particular large-scale change in liquidity, such as in the US in the 1970s.

It could be that financial asset losses of the recent year have caused some consumers to consume less, feeling a (negative) wealth effect from the equity market effects of the recent credit market turmoil. But that does not mean we are, as an economy, experiencing severe price deflation.

In fact, as the Fed cuts interest rates, leading to the decline in the value of the dollar, expressed in other currencies, imported commodities, such as energy and metals, are becoming more expensive. That would be, ah, inflationary, Jim.

Doug Dachille, on the other hand, sensibly saw two outcomes of the ever-lower rates demanded by Cramer. He foresees either more excessive risk-taking by financial institutions, or no risk-taking at all, with banks simply buying higher-yielding, longer-term Treasuries.

Either alternative, Dachille noted, is unwanted.

Then, later in the hour, Cramer reversed himself and declared Wal-Mart's troubles to be self-inflicted. After having declared all retail in peril, and a general recession, Cramer accedes to Dana Telsey, a prominent and solid retail analyst, who contends that the big box retailers are in trouble, but the more nimble, smaller retailers are not.

Suddenly, Cramer forgot his earlier rant about widespread economic softness, signaled by Wal-Mart's disappointing January sales reports.

You have to remember, though, Jim Cramer is a conventional Wall Street liberal Democrat. It's a weird combination of buccaneer trading and capitalism for himself, but populist bailouts with Federal money for the "working poor," or even middle-class, from which he apparently came.

Thus, Cramer prefers, and demands, populist remedies to immediately end any economic or financial markets pain, no matter what the cause. If speculation and lax lending, securitization, rating and investing practices by private players and investors caused current credit market problems, so what? Just turn on the monetary taps and wash all those unpleasant losses away.

Long term inflation? Who cares? Again, remember, Cramer was a daily-focused hedge fund trader. He is on record as having shilled prices of securities his fund held via rumor and media manipulation, to make a buck for the day. Long term economics and financial market horizons for him may well be tomorrow afternoon.

It's a sobering, but important observation to make concerning Cramer and his ilk. There are those calling that we are on the brink of another Great Depression and market crash. Yet, more professionally-trained, well-regarded economists and analysts seem to think we are simply experiencing a natural part of the business cycle- slowing growth.

Confusing the two could be very damaging for the US economy, financial markets and dollar in the long term.

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