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Unexpected Earthquake in U.S. East Coast Spurs a Stock Market Rally?

By Kaufmann | August 24, 2011 No Comments »

 A rare earthquake of magnitude 5.8 shook the East Coast of the US earlier today, affecting Washington, D.C., New York, their environs some environs, and Virginia.  While an earthquake of this magnitude carries a minimal fraction of the force of the mega-earthquakes experienced by countries like Chile, Japan, Indonesia and Haiti in recent years, it did rattle buildings and nerves. 

And it raised questions about building safety in this geographical area, which is not known to be earthquake prone.  Thus it has not been subject to the more stringent building codes that apply in places like California, not to speak about the large stock of very old structures which exists in the East Coast… 

In looking for an upside to the earthquake, other than the relief in realizing that there were no major injuries or damage, some may quip that the earthquake can be salutary, since Washington was in dire need of being shaken and rattled.  The problem with this argument is that the timing was off, since politicians are in recess and mostly far away, so they would have hardly noticed.  In fact, newswires, Facebook and Twitter were abuzz reporting just after the earthquake struck that the Capitol building had been evacuated.  But that should not have been difficult, at least in terms of evacuating the VIPs, since they were not around.

  

It is no secret that nowadays it is politicians who in the eyes of both voters and entrepreneurs are being regarded in particularly poor light.  Recently I wrote about this here, so will not repeat it, except for providing a summary graph showing how the US Congress is viewed by firm managers nowadays, compared with yesteryear, and also compared with other countries.  The picture is dire regarding the view on the U.S. Congress today, and starkly contrasts the view by firms of their Parliaments in other countries (seen in this chart, picked up by the Economist). 

But let us face it:  today’s earthquake is unlikely to make any difference to this view on a dysfunctional US Congress; the required shake-up is obviously much more fundamental, and political rather than geological in nature. 

Yet could it be that the earthquake may have had an effect, either way, on the stock market?   A brief look at what transpired at the New York Stock Exchange may, or may not, suffice.  At 1.48pm earlier today, August 23rd, a couple of minutes before the earthquake struck,  the level of the Dow Industrials Average (DJIA) stood at 11,063.  Right after the earthquake hit, the Dow dips slightly, but to quickly recover and then climb substantially, to end at 11,177 by closing time at 4 o’clock. 

Consequently, the Dow closed over 100 points (a full percentage point) above the pre-earthquake level merely a couple of hours earlier.  In short, the stock market rose quickly in the aftermath of the earthquake. 

Concluding from such simple empirical observation that earthquakes can help the stock market obviously belongs to the ’ridiculous statement’ list, or the ridiculist.

But nowadays I do not stand out pointing to this causal link, however ludicrous.  Add this assertion to the mix of statements about the economy that we have heard in recent weeks from politicians, merely stating that ’earthquake helped the stock market’ (based on the above evidence), while it may make it to the ridiculous list, it would not rate near the top in the ‘Politician Statements on the Economy Ridiculist’.

The competition for the top slot in the Economic Ridiculist has been fierce among politicians lately. Take for instance the claim that Bernanke’s monetary policies at the Fed are ‘treasonous’, reflecting not just disrespect for Shakespeare but an utter misunderstanding of economics, finance, and the Fed’s performance (which has been good).  Or the myriad of statements about the failure of the expenditure stimulis implemented by the US Treasury (they actually worked, more is needed).

Or the statements about the salutary effects of not raising the debt ceiling, reflecting ignorance about the distinction between stocks and flows, and between past IOUs and future expenditures.  Or the irresponsible call for major budgetary expenditure cuts as soon as possible, thereby increasing the likelihood of a recession.  Or the notion that egregious tax loopholes for oil companies need to be protected, and justifying it with the misleading claim that they can make a difference in increasing aggregate demand at the macro-economic level.

One can go on and on regarding basic economic and financial fallacies that prevail nowadays.  I merely wanted to illustrate the anti-intellectual and anti-knowledge environment that seems to have taken hold of the political discourse in Washington, adversely affecting policy-making and market sentiment.  This matters enormously, since it is already having dire consequences for the US economy and potentially for the world at large.

Paradoxically, in today’s globalized world, in contrast with the US (and with some countries in Europe), many emerging regions exhibit much improved macro-economic management than in the past, reflecting learning from experience, improved know-how and global dissemination of such know-how, graduate education in top schools abroad and at home, and, importantly (outside of the US), increased deference to technocrats on difficult economic and financial matters.

Take for instance Latin America, and countries like Chile, Uruguay, Brazil, Colombia, Costa Rica, among others.  Politicians increasingly understand the importance of relying on evidence, some modicum of science and expertise, and thus on technocrats, even if some macro-economic issues are obviously still subject to political and technical debates.  These countries also pay close attention to the financial markets, which do provide an important signal when deviation from common economic sense takes place among politicians and policy-makers.

Irrespective of ideological affiliation, nowadays in many Latin American countries politicians do understand that there is no room for ’voodoo’, or ‘supply side’ or any other extreme ’fundamentalist’ construct for economic policy.  In many of these countries any remaining divide regarding macro-economic policy does not follow an ideological divide, but is strictly generational instead.

Misunderstanding on the basics of economic policy was part of a certain political class two generations older than the current policy-makers in power.  The younger generation not only understands well the analytical and practical aspects of macro-economic policy-making, but the approaches taken are common to both (left- and right-of center) sides of the ideological spectrum.  And it is rare (though it can still happen) that politicians irresponsibly try to undermine a serious head of a Central Bank or a Minister of Finance who is technocratically carrying out her or his job steering the economy. 

It may be revealing for some members of the US Congress to undertake a study tour to some countries in Latin America.

Topics: capture, financial crisis, G-20, Measurement Frontiers, Public Financial Management, Public-Private Linkages | | Read and Submit Comments

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