My bet with Eric Norlin
This morning, I got a note from Eric "DigID" Norlin, who said: "...direct disagreement over your war forecast (no big surprise there huh?) ;-)"
My reply was that I did not see how anyone with a sense of history could say that marching into a country without almost unanimous international support would be a good idea. Eric's reply turned away from that question and focused on the markets, which are related to my prediction, because I suggested the U.S. is setting itself up for economic counter-attacks by a large part of the world, especially China and Russia, which would like to claim a little of the capitalist pie for themselves.
Predictably, because Eric likes to argue with me, he said that he too is a student of history and disagreed. He says the market, which is rising on anticipation of a quick war and a fast turnaround, is an accurate predictor. In so many words, I said that, as it has done it the wake of the bursting of other speculative bubbles, the market is not reliable right now and is chasing any positive news (and ignoring the rafts of bad news just today, including Oracle's weak licensing revenue and lots of lay-offs). Specifically, I wrote to Eric in email:
As for the predictive quality of the markets, there is little evidence that in a post-bubble environment (the first few years after a speculative bubble bursts) that a market is predictive at all. In fact, it tends to become more uncorrelated to wider economic reality.
I agree that, if the war were to end Thursday, the markets would do well. But that doesn't mean that the layoffs and other things going on in the economy (as distinct from the market) will reverse. The rising deficits virtually assure we hamstring our ability to react to continuing downdrafts with effective monetary policy. Eric's contention is that it would be "different this time" for the market to be wrong, but he is looking selectively at history. This time isn't different, it is exactly like 1931, 1938, 1975, 1890, post-South Seas bubble in England, etc. He's looking at only one side of the cyclical waves when he cites the predictive record of buying into a highly unpredictable situation.
Eric also argued that it is "possible" Iraq could become a quagmire. I think the record of the 20th, 19th and 18th centuries are against an imperial occupier. Afghanistan being only the most recent example of a poorly managed post-conflict political reconstruction -- giving this president a .000 batting average thusfar.
Finally, Eric says there is no sign of deflation. I countered that the Bank of Japan today had said that it is going to act aggressively against deflation and needs other central banks to pull with it to succeed:
Toshiro Fukui, the incoming governor of the Bank of Japan said in Parliamentary tesitmonty that the government had an important role in tackling deflation, both through fiscal measures and through tackling bad debts in the financial system, the ossification of which the BoJ regards as the principal obstacle to effective monetary policy. He implied that recent moves by banks to raise capital in the markets would be inadequate and that state capital injections might eventually prove necessary.
So, he suggested a bet that the S&P will rise at least 15 percent this year. I pointed out my predictions are already on the record, and so we have a bet.
Posted by Mitch Ratcliffe at March 18, 2003 09:27 PM | TrackBack