TAL Money Memo 2-04-09: Groundhogs Versus Wall Street Prognosticators

Two drunks were lurching through the graveyard of Trinity Church at the West End of Wall Street in Manhattan.  One of them stumbles over a gravestone that says, "Here lies an investment banker and an honest man."  The drunk turns to his friend and says, "Can you believe it, this place is so crowded now, they're burying them two to a grave!"

PUNXSUTAWNEY, Pennsylvania (Reuters) - America's most famous groundhog declared on Monday that the country will have six more weeks of winter.
Punxsutawney Phil, the latest in a line of rodents that have been "prognosticating" on the length of winter for 123 years, saw his shadow in the morning — considered an omen of how long winter will last.  [Technically, Phil is a large member of the squirrel family, but let's not be picky.]

Punxsutawney's organizers estimated 13,000 people — some from Japan, Iceland and Egypt — witnessed Phil do his thing while shivering in low temperatures.  "It's just part of America," said Marirose, a teacher.  The  crowd dispersed to the sounds of Bobby McFerrin's "Don't Worry, Be Happy,"

In New York City, another groundhog called Staten Island Chuck failed to see his shadow when he was lured from his cage by Mayor Michael Bloomberg, predicting that spring was near.

Two Canadian groundhogs, Wiarton Willie in Ontario and Shubenacadie Sam in Nova Scotia, saw their shadows on Monday to forecast a lingering winter.

So, apparently, three out of four groundhogs say that winter is gonna hang on a while longer.  Did anybody else notice that the NYC groundhog - a shill named Staten Island Chuck - is the only one that said "Spring is near!"  (Did anyone know that Staten Island even had groundhogs?)  This NY fatso must be related to all those Manhattan economagicians who say, "The second half of the year will be much better than the first half, and unicorns will appear in the streets and sprinkle money dust on the economy.  Buy more stocks and bonds now!"

The Reuters article on Groundhog Day ended with the following:  Authorities in Punxsutawney say Phil is always correct, but according to the U.S. National Climate Prediction Center, he and his fellow groundhogs get it right only about 39 percent of the time.

This is a prognosticator?  39% accuracy?  Hey Phil, get a quarter and flip it; you've got at least got a 50-50 shot at being right.  Poor little Phil, who may be drunk, or merely be trying to escape from that little tree stump cage he has to live in, has been given the status of climate prediction expert.  And he's right less than 40% of the time?  Punky Phil gets on national TV EVERY year, and he only gets it right two out of every five years?  Wow.

And the thing is, Punxsutawney Phil may have a better record than Wall Street.  To wit:
at the beginning of 2008, fewer than 5% of Wall Street's recommendations were sells.  And the S&P went down 38% for the year.

In January 2008, almost every expert at the Davos World Economic Forum said the world would muddle along and be Ok.  Nouriel Roubini, a professor at NYU, said things would be lousy.

At the beginning of 2008, Goldman Sachs told everybody to short gold.  Gold and U.S. Treasuries were the only asset classes that went up in 2008.

On March 12, 2008, the CEO of Bear Stearns told everybody they were fine.  On the 17th of March, Bear sank beneath the waves of J.P. Morgan for $2 a share.

In September, the CEO of Lehman told everybody they had plenty of cash reserves…and they declared bankruptcy a week later.

Similar announcements of fineness were made by Fannie Mae, Freddie Mac, AIG, and 25 other banks that the FDIC seized during 2008.

In the fall, Merrill CEO John Thain told new owner Bank of America that Merrill had no more big derivative losses to worry about.  (But he did say he might go a few bucks over on his decorating budget?)  B of A asked for another $20 billion of TARP money to cover over Merrill derivative losses at the end of the year.

Didn't anybody in New York see anything bad coming?  With mortgage companies going broke, housing sales and prices falling, car sales plummeting, CDOs and Credit Default Swaps imploding on top of the blotters of their own proprietary trading desks?  During the entire year, nobody saw nothin' bad coming?

Wall Street makes Punxsutawney Phil look GOOD!

In the book, Future Shock, Alvin Toffler noted a study that showed that a group of high school students could predict the future pretty much as accurately as a group of experts could.  Toffler hinted that the experts could be biased.

So let's write this down.  Wall Street's record is no better than Punxsutawney Phil's, and Phil's grade score is 40%.  We should remember that any time some TV financial wizard is blithering on about the future, we should ignore them.

And those near-expert high school students?  My guess is that high school students would say something like: "Things look grim, dude.  Our economy looks pre-Zimbabwean or somethin'.  Like maybe people should check out history…go back to basics.  Maybe people should buy some gold or silver, eh?  Precious metals have protected people since…like…forever.  My granddad said that."