That Radical Obama Wasn't So Awful for Markets
We celebrate several market-related anniversaries this week. Perhaps the best known is the market low during the financial crisis, which occurred eight years ago tomorrow. Remember the despair on that day, March 9, 2009, when the Standard & Poor’s 500 Index hit 667 (it’s at about 2,368 now)? Think hard, too, about whether you scoffed when newly elected President Barack Obama just a few days earlier urged investors to buy stocks.
Or has your hindsight bias already replaced that week with the memory of a more comforting and self-congratulatory narrative?
Maybe you were one of those who nodded in agreement with a Wall Street Journal op-ed by Republican economist Michael Boskin, which also is celebrating an eight-year anniversary this week. The headline, which couldn’t have been more off-base, said it all: “Obama’s Radicalism Is Killing the Dow.” In the meantime, the S&P 500 increased 232 percent from the time Boskin’s op-ed appeared to the day Obama left office.
This is another cautionary tale of how dangerous it is to confuse your own partisan politics with objective market analysis. Boskin’s contra-indicator warning was almost perfect and just three days later the S&P 500 touched bottom before taking off on one of the longest runs in years.
Boskin’s op-ed touches upon many of our favorite themes: The false narrative; the emotional confusion that occurs when investing advice is seasoned by ideological beliefs; confusing correlation with causation; and the problem of ministers without portfolios (pundits with no skin in the game).
And yet it offers at least two important lessons (I’m sure you can find others): First, some political operatives sometimes don an economist’s clothes to disguise their partisan messages to the investing class; and second, politics and investing don’t mix. I harp on the latter over, and over and over because it’s so clear how bad the results can be when people ignore this.
A bit more about Boskin, who headed up a study commission that bore his name and was charged with studying the way the consumer price index is constructed. The Boskin Commission was then asked to make recommendations for how the CPI should be used in calculating changes in government benefits payments.
The result was a flotilla of nonsensical and politically driven adjustments that had the effect of artificially lowering inflation measures by more than 1 percent. The goal was to provide a rationale for decreasing Social Security payments by reducing cost-of-living adjustments, while minimizing any public backlash.
But that wasn’t the end of it. The unintended consequence of monkeying around with the CPI calculation was a substantial understatement of inflation in the official data. This ultimately led to then-Federal Reserve Chairman Alan Greenspan keeping interest rates way too low for way too long, from roughly 2001 to 2006. Ultra-low rates were an important factor in the subsequent financial crisis.
Thus, in my book, “Bailout Nation,” (see pages 132, 151-154) Boskin is one of the little-noticed perpetrators of the financial crisis. In his own way, he helped set the table for the disaster that followed. He may not make my top 25 list of who is to blame for the crisis, but he is an indirect factor.
All of this is a roundabout way of showing why data matters so much and why being grounded in reality and free of as many partisan influences as possible is so important.
Here is where it gets interesting: With a Democrat no longer in the White House, replaced by a Republican, many of the same bad clichés and memes are recirculating -- only the party affiliation has changed. Some pundits on the left seem to have not learned the lessons they should have taken from the errors of pundits on the right.
There is some degree of nuance required to unpack all of this. Markets are still experiencing the residual effects of the crisis period: even after all of the gains, this remains a hated rally. Just think about how hard it is resist the powerful undercurrent of skepticism about anything involving the economic recovery. The psychology of fear very easily combines with political emotions to create a basis for avoiding U.S. equities. There are always good reasons to consider reducing your equity exposure -- valuations, better opportunities elsewhere and rising interest rates. However, fear and politics are, and always will be, a terrible basis for making investment decisions.
Revisiting Boskin is useful, especially now: He is a stark reminder to keep your politics out of your portfolio. If you need more proof, think about how tough it would be to make up the lost ground if you sat out the rally of the past eight years because you believed Obama was a radical out to destroy the equity market.
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