I'm as mad as hell, and I'm not going to take this anymore!

Yesterday afternoon FOXNews ran a promo about a program that would air later that evening at 9:00 PM, a special edition of Geraldo Rivera's program, the first hour of which would be live coverage of Sarah Palin's keynote address at what was billed a National Tea Party Convention being held at a hotel in Nashville. I tuned in at 9:00 to see what Palin had to say, and to whom she was saying it to. Much to my surprise did I discover that C-SPAN was airing the address as well!

Earlier in the day, FOX had interviewed a gentleman from the Volunteer State who apparently felt that this convention had gotten too much ink whereas his own assembly of tea partiers deserved equal recognition or respect or who knows what. Although tea parties have become newsmaking bunches nationwide, evidently there's little or no true national organization. As an armchair observer it appears that the only forces that bind "partiers" nationwide is (1) a dismay at the the lack of influence constituents possess over their elected federal officials, and (2) a looming distaste/fear of mountains of legislation emanating from Congress bringing unprecedented amounts of deficit spending in a stated attempt to address the economic ills of the day. But make no mistake about it: independents and liberals has signed on to join conservatives. If you want to add your voice to those of your fellow Americans who are protesting the ills of Washington today, there are few better opportunities to do it than at a tea party.

The bailouts conducted in the latter half of 2008 under the Bush administration rang in a new era of fiscal irresponsibility in Washington, one that exposed the close ties between members of Congress and certain wealthy and powerful constituents. So far implicated in the private sector are executives of Goldman Sachs, AIG, the Big Three in Detroit; and the bosses of the UAW. Add to that favoritism the egregiously dangerous deficit spending, rising unemployment, and emerging news that the stimulus was an abject failure, and the stage is set for grass-roots protests.

The title of this article for those who don't already know is a line from the from the motion picture film Network, which came out in 1976. Films I'd learned are signs of the times. The most popular films from Hollywood are those written and directed by people who are in tune with the zeitgeist and can crank out a picture that will resonate with the current mood of their vast audience. This five-minute video from Network posted on YouTube captures what is perhaps the heart of the movie. A television newscaster stumbles in from the rain and enters the studio to go on camera as scheduled. Seated at his desk the program begins to air. The words from his mouth though don't come from the producers' script.

"It's a depression. Everybody's out of work or scared of losing their job," rants the rain-drenched anchor who remains clothed in his trenchcoat. He soon launches into a tirade, claiming that he has no solutions of his own to the threats of the depression, the inflation, the (Cold War) Russians, and crime in the streets (sound familiar?) . He then tells his television audience with a passionate grimace and tone of voice, "All I know is that first you've got to get mad!" He rises to his feet and with the thunder of a Bible-thumping preacher exhorts viewers to open the window, stick your head out, and yell, "I'm as mad as hell, and I'm not going to take this anymore!" His producer played by actress Faye Dunaway races from the control room to other offices to find out how many other cities served by her network have citizens yelling out their windows, and after learning the impact of this this evening's program, struts off down a hall gloating, "Son of a bitch! We struck the mother lode!" During the following minute or so the action shifts to a rainy city street in a thunderstorm lined by multi-story apartments. A rising cacophony ensues as apartment dwellers throw open their windows and scream at the tops of their lungs, "I'm as mad as hell, and I'm not going to take this anymore!"

Wild stuff, huh? And that wasn't even during a real depression. But Hollywood can sure dress up the drama, and Network delivered in spades in 1976. I saw it myself in a theater back then.

The collective mood of the public shifts, somewhat as a pendulum swings, from joyful to dark and back again, sometimes to mild extremes, at others to ones more severe. In 1976 the mood was rather sour, as one can infer from the litany of social ills that the newscaster was ranting about and his resonance with his audience. During the dot-com boom, the mood was just the opposite, and had a studio released Network then it would have been an abject failure at the box office simply because there was precious little to be angry about and plenty to enjoy and embrace. Beginning with Toy Story, Pixar's 3-D animated bombshells began exploding, charming both children and adults alike. The Internet and the World Wide Web arrived and ushered in a social and high-tech sea change, akin to that of the first commercial radio broadcasts of early in the twentieth century.

As surely as day yields to night, booms yield to busts. The larger the boom, the larger the bust. As booms go, the decades of the 1980s and 1990s witnessed a one of exceptional magnitude, one stoked even further by the easy-credit policies of the Greenspan Fed. After several years of retracement in the early 2000s, the economy raced ahead for its last hurrah. Those nasty bubbles then began to burst one by one, signaling the end of the party and the end of the joyful mood that had endured for over two decades.

The mood of today has the earmarks of one growing ever darker. Its shifts are gradual, so subtle that they're almost imperceptible. The mere presence of tea parties though is evidence of a dark shadow looming. As people collectively feel the squeeze, many band together and spontaneously form events like these.

We've not seen the last of the tea parties, and we've not seen the most forceful. Whereas the ones so far have been principally civil affairs, as anger rises so will numbers and violence. How they will evolve is anyone's guess, and the responses of the Republican and Democrat parties will play key roles. I am not a sociological forecaster so I will make not even a guess here.

In closing I'll merely cheer on the Tea Partiers and epitomize their emotions with a cyber-bellow:

I'm as mad as hell, and I'm not going to take this anymore!

The Ominous Secrecy of the Federal Reserve

Chapter 10 of Robert Prechter's book Conquer the Crash makes a good case that the monetary policies of the Greenspan Fed exacerbated the economic ills we labor under today. Republican Representative Ron Paul of Texas is one of the few in Congress who "get it" that there are threats to our national security that emanate from Washington D.C., and IMO the Fed is one of them.

This article from DailyPaul.com reports that Paul had introduced H.R. 1207, which would have required a full audit of the Federal Reserve and its activities, which crosses international lines. It also reports that another rep, Democrat Mel Watt of North Carolina who'd been bought and paid for by large corporations like American Express, Wachovia, Bank of America and the American Bankers Association, gutted Paul's bill.

What are the ties between the Fed and these companies, and what are the fears that drove them to buy off Watt to keep the Fed's secrets under wraps?

There's something rotten in Denmark, as the saying went.

Why economists are abysmally poor forecasters

My Own Experiences As a Scientist

Wikipedia characterizes economics as a "social science". This means that it's a branch of science that studies human societies, in this case the production, distribution, and consumption of goods and services. My father was trained as a scientist and passed his love of science on to my brother and me, who both earned our bachelor's degrees in computer science. My minor was math/physics and I'd studied AP Chemistry in twelfth grade. So I was rather well trained in science as well given that I held only an undergraduate degree.

While earning my B.S. in computer technology I was an A student in my major and minor, caught a few Bs in stuff like poetry that I didn't really grok, but only two Cs and one of those was in a three-credit course in economics. My prof was some immigrant lightweight from India who couldn't even pronounce my last name correctly. "Yace" he would say when taking attendance. The subject matter must have been so confusing that I couldn't grasp it well enough to regurgitate it properly on his exams. So I took my C and went on.

My Father's Experiences As a Scientist and Forecaster

My father was born in 1913, a teenager during the Great Depression, and after earning his degree from Syracuse University he landed a job as a school teacher teaching math. He also had training in other sciences like geology. Along came World War II and the Army Air Corps (now the USAF) needed meteorologists to forecast weather stateside. There was a lot of cross-continental military traffic and pilots need forecasts to do it safely. I know that first hand because in the 1980s I earned my own wings as a private pilot with an instrument rating. FAA regs say you must obtain an official briefing before taking off, and that includes a weather component. Dad wasn't a warrior, but he wanted to serve so he enlisted and the Army sent him and a bunch of other recruits to study meteorology at NYU. After graduation, the brass stationed him in Phoenix
.
Well it turned out Phoenix really wasn't such a good place for an air base. Some pilots would fly in, report a "problem" with their plane, which caused it to be grounded overnight. This was merely a ruse to get a night on the town with whatever women the pilot could scare up. The brass caught wind of this and moved the base to Coolidge, Arizona. Right smack dab in the middle of nowhere. If you were into desert and cacti, that was heaven. Our pilots weren't. Miraculously those "problems" stopped happening. Go figure.

Please indulge me dear reader as I say a few words in praise of my late father, Eugene Ace, former Captain US Army Air Corps. Dad did nothing half-baked. When Gene Ace did a job it was always his A game. Turns out he had a knack for forecasting and this was not lost upon the brass. While cleaning out our family home for sale after his death in 2008, I stumbled across a newspaper named El Saguaro after the species of cactus that grew in the Arizona desert. The publishers were troops of the 572nd AAF BASE UNIT, 3rd FERRYING SERVICE STATION. This issue was published near the end of the war in March 1945. The headline read:

Navy Rates Coolidge AAF Best In Over 100 Fields Considered

Of course Dad didn't do it single-handedly. There were plenty of other troops, mechanics and supply guys and anyone else needed to keep airplanes flying and the weather guys informed; without reports from other observation points, it's impossible to make a usable forecast. And the commander of the base was a major who must have had quite a knack for riding herd over the whole op.

To add perspective to this, an article on Page Two of the issue bore this headline about our military ferrying system:

160,000,000 Miles Flown Delivering

13.5 Billion Dollars of Aircraft

It notes among other facts that long before Japanese bombers assaulted Pearl Harbor, the Ferrying Division was delivering planes to the Canadian border for use against the Axis under lend-lease agreements. Although he never saw combat, Dad had played a vital role in helping our pilots get their aircraft into the European and Pacific theaters. That wasn't a "war" like the invasion of Iraq, that was a real war, declared by Congress against the nations of the Axis. The Allies had to fight for their very lives every day with every airplane, tank, ship, and submarine available to pull out a victory. I can only imagine the waves of relief first on V.E. Day and then on V.J. Day. The guys who survived could all go back home to their wives and girlfriends. Others less fortunate were buried in Arlington, or in fields of graves marked with white crosses.

After the war the Army no longer needed Dad's services so he got his Honorable, someone hooked him up with the National Weather Service and he landed a job as a forecaster at La Guardia Airport in Queens, NY. Now most of his "clients" were civilians: private pilots all the way up to the ATPs who flew airliners. Some sharpies even had his office telephone number and would augment the info from the FAA's briefers by ringing him up on occasion for an advisory right from the horse's mouth. Dad met my Mom at that job and worked it for several decades thereafter, eventually moving to an office at JFK nee Idlewild airport.

The point of all this is that as a boy I'd witnessed first-hand that a competent weather forecaster could produce a forecast with a high degree of accuracy, a degree good enough that airline pilots could fly safely (or stay on the ground if necessary). Meteorology was indeed a true science with many practical applications.

Forecasting Economic Trends

Wouldn't it be helpful if scientists could forecast economic trends as well? As I would discover decades later, those scientists have traditionally been economists. And although economics may be useful for some endeavors, it's abysmally poor as a forecasting tool. A dartboard will give nearly the same accuracy.

I'd finally come to discover the truth: economics is partly a bogus "science". First there are different "schools". What on earth is up with that? Which is the right one? To compound the problem, some economists treat the economy, a living organism, as a problem in physics. Whereas Isaac Newton's First Law of Motion applies well to inanimate objects, it doesn't work for organisms like economies. And lastly, even if they don't consciously admit it, they all know deep inside that they can't forecast their way out of a paper bag, so when it comes to forecasting the limbic systems of their brains kick in and they begin to herd. When you get it wrong, at least you have lots of company.

One question I've been fond of posing lately is this: At the end of 2007, how many economists correctly forecasted the steep selloff in the stock markets and ensuing implosions that brought about the unprecedented bailouts we witnessed in 2008? Although I've never researched the answer, I strongly suspect it's a very tiny number.

I have to laugh at economists tossing terms like "supply side" and "velocity of money" around as if they really meant anything. Of all the subjects taught in universities economics is hands-down the goofiest. As for its schools, the Austrians seem to have it more right than the others. Keynsians are the very worst of the bunch. Wikipedia notes that President Obama's failed stimulus is consistent with Keynsian theory. Keynsians embrace central banks like our own Federal Reserve, which have been demonstrated to be problematic. Keynsians also like heavy governmental involvement in the private sector, yet another ill of our current era. They don't trust the private sector to get things right, so the nanny government must babysit our businesses. Today though no one is babysitting the nannies, and many of them are knee-deep in graft coming from – you guessed it – filthy rich suits in the private sector. Perhaps the most egregious failure of Keynsians is their ignorance of the effects of the Seven Deadly Sins.

To be fair, there are many professors of economics who have their heads screwed on right, a few Nobel Laureates among them. This ad, a letter to President Obama ran in newspapers in January 2009. Some readers might rail that it was published by the Cato Institute, but that would simply be shooting the messenger. First of all, they called him (politely) on his lie that everyone was in agreement about the stimulus. They then went on to make a brief yet cogent argument against the stimulus and in favor of other approaches. The new president though was hell bent on doing things his way, other advisors far wiser about the topic than he was be damned. Candidate McCain wasn't much better; he had his own harebrained plans for deficit spending.
Even though they were onto something good, I doubt the Cato folks had any game at forecasting.

Why Is an Accurate Forecast Important?

That's an easy question to answer. Economic conditions factor directly into governmental revenues. During prosperous "boom" eras like 1982 through 2000, revenues go up. I know very little about Reaganomics, but I do know that it wasn't just federal monetary policy that propelled the DJIA and the other major stock indexes into the stratosphere, had the Newton's First Law loonies calling for DJIA 30,000, and brought us the prosperous 1980s and the dot-com boom of the 1990s. President Reagan got lucky; Americans elected him upon the eve of a major economic boom, which originated in the private sector. Booms favor incumbents, and he won a second term 1984 as well. Busts favor challengers, and the bust in 2008 was yet another nail in the coffin of the Republican Party's hopes for a win in November.

So when the CBO is planning stuff for a year or two or five ahead, they really need to know up front what kind of revenue stream they'll have to work with. But they can't forecast that, so out with the dartboards and just wing it. Is that any way to manage the fiscal affairs of the nation? Hell no, but that's how it's done.

Why Can't an Economist Forecast His Way Out of a Paper Bag?

The principal reason is that he doesn't use the right inputs, and another is that he doesn't grasp the fundamental distinction between a physical object and a living organism. In the words of then president-elect Obama,

There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy.

The economy isn't a gasoline engine that can be "fixed" or "jumpstarted". A theory based upon a flawed foundation just won't fly. That explains why the stimulus is fizzling. To employ a physiological metaphor, the fiscal stimulus is analogous to a physiological stimulus: snorting a few lines of cocaine. The user gets an artificial high and then it wears off, leaving the user desperate for more. I've worked in treatment centers for addicts; cocaine addiction is hellish.

Make no mistake about it. Forecasting economic trends is nowhere nearly as easily accomplished as forecasting weather. And according to at least one financial analyst, economists have the tail wagging the dog. More on that in a bit.

The Stock Market and the Economy

In 1987 I'd learned of commodity futures and took an interest in them and in the financial markets in general. These were fascinating places where billions of dollars changed hands, and I figured if I could pick up a few crumbs I could make some nice money. Hah. If only it were that simple. Traders at the Chicago Mercantile Exchange quickly handed me Newbie Lesson #1: Newton's First Law doesn't apply to the markets. I got clipped for around $1,000 in a few seconds. Ouch! If I hadn't raced to a pay phone and tell my broker to get me out the damage would have been worse.

Well I may have been a tad reckless at first, but I wised up right quick after that and decided to get some professional advice. I scoured the futures pages of Investor's Business Daily and found a few guys who published newsletters. All were losers save one: The Elliott Wave Theorist published by a guy named Robert Prechter who I'd never heard of before. There was something different and intriguing in this monthly letter, so I kept that subscription paid up and let the others lapse.

Prechter began his career by earning a degree in psychology from Yale in 1971. That would become a key to unlocking the mysteries of the markets and the economy, both of which are driven by human psychology more than anything else. In 1975 he landed a job as a technical analyst at the prestigious Merrill Lynch and received a practical education in the craft of forecasting the markets. He would also learn of the works of a discovery by an obscure American accountant named Ralph Nelson Elliott. Through a twist of fate, Elliott began studying the behavior of the stock market and came up with a theory. The market exhibited among other things fractal-esque behavior, wherein patterns repeat and nest. Decades later IBM mathematician Benoit Mandelbrot would discover and name fractals and make a name for himself internationally.

In a nutshell Elliott's theory classified patterns ("Elliott waves") that recur continually in the markets. Prechter studied the theory and discovered that a trained analyst could use it in combination with other technical "indicators" to produce profitable forecasts. Any seasoned trader will tell you that there is no system that wins 100% of the time. But with a good forecast you become like the "house" in a casino; the odds are on your side. If you do all the other stuff (position sizing, stops, etc.) right, you can make money consistently.

What Prechter also grasped is that those fractals were products of mass human psychology. Prices of individual stocks kinda sorta traced out Elliott waves, but the big indexes like the DJIA and the S&P 500 delivered the most usable waves. Another simple yet key observation he made was that American stock indexes were a reliable leading indicator of economic conditions, and ones the feds can't cook. Our own indexes crested around November of 2007 and then began a slide like we haven't seen in decades. The leading indicator was sounding an unmistakable alarm. In the latter half of 2008 large companies began imploding, along with the TARP banks. Some suits at AIG were believers in Newton's First Law and got nailed for that mistake in spades. They were way overleveraged in derivatives known as credit default swaps, which can be highly profitable when you're on the right side of the trend, but deadly if you're not. The trend reversed and BOOM! In my opinion AIG should have been left to stew in its own self-created mess, but apparently their suits had friends in high places in Washington.

Forecasting of Financial Markets Done Right

Prechter it turned out had taught himself how to forecast some things quite effectively. He eventually left Merrill to found his own company, Elliott Wave International based in Gainesville, Georgia, and that's when I stumbled onto him and his publications. Over the decades Prechter grew his small operation into the largest market forecasting service in the world, hiring the cream of the crop to study and forecast for markets world-wide. In 2002 he published a book about the impending crash.

If I grasp the subject correctly, forecasting the timing of certain events is the most difficult part of the job. Back around 2002/2003 one could have made a case that the crash was underway. The markets though weren't ready then. I bought my own copy of Conquer the Crash shortly after its publication. It was not only an enlightening read, it made great sense. The first part is theory, and therein among other things Prechter really hammered the Fed. The second part is pure pragmatism. If you live in Florida and the weatherman says a Category 5 hurricane is on its way, you board up the windows and nail things down or bring them indoors. This crash is shaping up to be the financial and economic analogue of that hurricane. Those who don't prepare will pay dearly.

Over the span of a few years leading to the slide of 2008 I'd been accumulating shares of a mutual fund named Ursa offered by a company named Rydex Investments. Those familiar with Latin will recognize ursa as the word for "bear". Investing in Ursa meant just the opposite of investing in a "normal" fund. When the S&P 500 went down your shares appreciated in value; when it went up, you lost value. Well I'd put my faith in Prechter's forecast and was rewarded handsomely for my patience. In 2008 when millions of Americans who'd thought investing their retirement accounts in a casino were losing their shirts, my IRA grew by $30,000. Had I been more aggressive that number would have been larger.

Ya gotta love a forecast like that!

A Wise State Legislature

About one year ago legislators in Georgia became alarmed and did something very smart. Unlike the pols in Washington who just do whatever they please willy nilly, these legislators sought the advice of people who were experts in the field. They invited a handful to brief them on how to best weather the economic crisis. One of those analysts was their fellow Georgian Robert Prechter. I watched a video of his talk. It was rather brief, but the legislators received world-class advice.

Socionomics: Economic Forecasting Done Right

Prechter just keeps on cranking the stuff out. A while back he invented his own school of economic thought, one he dubbed Socionomics. He defines the discipline this way:

Socionomics is the study of social mood and its results in social actions. It studies how waves of endogenously regulated social mood in turn regulate changes in the economy, political preferences, financial markets, pop culture, etc.

In a nutshell, socionomics stands conventional economic theory on its head, and makes the dog wag the tail. This school has developed quite a following since its inception. There is now a Socionomics Institute, publishing its own monthly newsletter, The Socionomist. At $19/month it's a fascinating read, chock full of stuff about societies around the globe. Some of the topics covered recently are epidemics, eugenics, the unraveling of the European Union, and many more discussions of things that either are or will become important to our lives.

Hooverville V2.0

My belief is that had Republican Herbert Hoover served as president during prosperous times, he'd have made a fine president. He championed volunteerism and was not a career politician as many of the rascals in Congress are today. Unfortunately he'd could not have chosen a worse year to win an election.

People for the most part are prone to respond to their emotions and eschew reason. Although Hoover didn't cause the Depression, every bad situation was blamed on him. I know of nothing more memorable than the Hoovervilles, ad hoc shanty towns established by homeless Americans and sporting tents and shacks as dwellings. Democrats of the time seized a golden opportunity to attack the Republican administration.

Well, the "villes" are once again in vogue, thanks to our current economic situation.

Although this story dates back to September 2008, it is relevant insofar as the plight of poor Americans has been growing since the economic collapse began. "Nickelsville" is a jab at Greg Nickels, who was serving as the mayor of Seattle at the time.

Now in February 2010 we have Obamavilles. A Google search I just ran turned up nearly 100,000 hits. This number will increase as the economy continues its slide into the abyss. In the not too distant future, "Obamaville" will be a household word.