Going Against the Grain
27th November 2009
The Malta Independent - Friday Wisdom
Alfred Mifsud
I admire people who take a stand which
separates them from the mainstream, provided they do so out of conviction not
convenience.
In the investment world such people are called contrarians. Investor par excellence Warren Buffett makes his largest investments at times of crisis. He takes a back seat when everyone else is exuberant. His famous quote is to be fearful when all around are bullish and bullish when all around are fearful.
In economic terms contrarians are generally referred to as prophets of doom. Among the few economists who came close to forecasting the financial crisis there is Nassim Nicholas Taleb who in his book The Black Swan had forewarned that the mathematical thinking which has dominated economic teaching in the freshwater universities (universities around the Chicago area near the lake freshwater) were rubbishing real economics which has to take account of people’s feelings and expectations. The feelings of fear and greed change over time and cannot be adequately captured by statistical models. Such mood shifts had inevitably to produce a black swan which does not sit within the bell shape curve of mathematical probabilities. The black swan of 2007/2009 proved he was right and the mainstream of rocket science economic mathematicians were wrong when they considered such an event as unlikely as the end of the world.
Nouriel Roubini has been tagged as Dr Doom, even though he protests he should be called Dr Realist, because he had been warning about the financial collapse when banks were still partying and jacking up their leverage, oblivion to the risks ignored by their faulty mathematical models.
Where I part company with contrarians is when they act irresponsibly and continue to be eternal optimists in the face of unquestionable adversity.
During these difficult economic times the general posture is one of survival with consumers and entrepreneurs cutting back on non-essential consumption and postponing investments. While this makes sense at the micro level, if adopted widely the cumulative lack of consumption and investment will throw the economy into reverse gear resulting in a recession which if prolonged could develop into a depression.
So governments have stepped in to fill the spending gap to sustain economic activity. They do this both through higher spending, mostly by launching productive infrastructural investments or by reducing taxes to leave more spending power in the hands of consumers hoping they would spend it rather than save it. In so doing governments are like pushing a car whose engine would not start. They push it by incurring higher deficits, temporarily, to give the car momentum to start on its gear and then hoping to recover the deficit once the economic engine starts firing on its own steam.
So I am full of admiration for such projects as refurbishing the new Palace Square. I know people much more qualified than me have expressed reservation about the modern feel being given to the old square but partly because I don’t feel qualified enough and partly because I prefer to see the real thing before commenting, I brush such reservations aside and applaud the implementation of such projects at these recessionary times.
Where I get knocked out by our contrarians is when I read that a celebration is being organised for the re-opening of Palace Square that will be choreographed by Jochen Schweizer, who was responsible for the celebrations marking the restoration of the Bradenburg Gate and the opening of the Petronas Towers in Malaysia and the Rockfeller Center in New York. We have been further informed that a detailed programme of the celebration events will be mailed to each household and advertised in the media. On TV news it was stated that the budget for the celebration events is ‘somewhat’ smaller than the budget for the hard spend on the project. If this is not misplaced optimism when cautiousness is needed, than I don’t know what it is.
For goodness sake why do we have to make things so out of proportion? We are talking about a refurbishment and redesign of a city square not a multi billion project. Does it make sense to spend such out of proportion budgets on soft celebrations rather than on lasting hard projects? Or is this a mere attempt to build some feel good factor to mitigate the pain of the recession and to cushion the blow once the revised utility rates get announced?
Another one who went against the trend this week is Minister John Dalli who has accepted the Cabinet’s nomination for EU Commissioner. While many nationalist MPs are in silent, and not so silent, revolt for being kept out of a Cabinet post, Minister Dalli is moving out of Cabinet to take residence in Brussels. The next election will be the first one since 1987 he will not be contesting.
It would be wrong however to conclude Dalli is closing the door upon a return to local politics. We have had many instances of Commissioners who give up their post to take a new role in domestic politics if circumstances change. The latest sample is Lord Peter Mandelson who gave up his EU Commissioner of Trade appointment to take a high level Ministerial role in Gordon Brown’s cabinet where de facto he is considered as the second in command.
It is difficult to escape the conclusion that the Prime Minister’s motivation was more an upstairs kick than to reward Brussels with our best brains. But the move suits Dalli too. If the PN loses the next election he will not carry any guilt and would have the credentials to challenge for leadership of the PN once Gonzi probably decides he has had enough of politics or the other way round. If the PN wins, obviously Dalli will phase himself into retirement at age 66 after a five year stint as EU Commissioner.
What I will be watching out as we approach the next general elections is whether Gonzi will take steps to anoint his successor to block Dalli’s potential return and ensure that his move to Brussels is a one way trip out of Maltese politics. Interesting times await.
In the investment world such people are called contrarians. Investor par excellence Warren Buffett makes his largest investments at times of crisis. He takes a back seat when everyone else is exuberant. His famous quote is to be fearful when all around are bullish and bullish when all around are fearful.
In economic terms contrarians are generally referred to as prophets of doom. Among the few economists who came close to forecasting the financial crisis there is Nassim Nicholas Taleb who in his book The Black Swan had forewarned that the mathematical thinking which has dominated economic teaching in the freshwater universities (universities around the Chicago area near the lake freshwater) were rubbishing real economics which has to take account of people’s feelings and expectations. The feelings of fear and greed change over time and cannot be adequately captured by statistical models. Such mood shifts had inevitably to produce a black swan which does not sit within the bell shape curve of mathematical probabilities. The black swan of 2007/2009 proved he was right and the mainstream of rocket science economic mathematicians were wrong when they considered such an event as unlikely as the end of the world.
Nouriel Roubini has been tagged as Dr Doom, even though he protests he should be called Dr Realist, because he had been warning about the financial collapse when banks were still partying and jacking up their leverage, oblivion to the risks ignored by their faulty mathematical models.
Where I part company with contrarians is when they act irresponsibly and continue to be eternal optimists in the face of unquestionable adversity.
During these difficult economic times the general posture is one of survival with consumers and entrepreneurs cutting back on non-essential consumption and postponing investments. While this makes sense at the micro level, if adopted widely the cumulative lack of consumption and investment will throw the economy into reverse gear resulting in a recession which if prolonged could develop into a depression.
So governments have stepped in to fill the spending gap to sustain economic activity. They do this both through higher spending, mostly by launching productive infrastructural investments or by reducing taxes to leave more spending power in the hands of consumers hoping they would spend it rather than save it. In so doing governments are like pushing a car whose engine would not start. They push it by incurring higher deficits, temporarily, to give the car momentum to start on its gear and then hoping to recover the deficit once the economic engine starts firing on its own steam.
So I am full of admiration for such projects as refurbishing the new Palace Square. I know people much more qualified than me have expressed reservation about the modern feel being given to the old square but partly because I don’t feel qualified enough and partly because I prefer to see the real thing before commenting, I brush such reservations aside and applaud the implementation of such projects at these recessionary times.
Where I get knocked out by our contrarians is when I read that a celebration is being organised for the re-opening of Palace Square that will be choreographed by Jochen Schweizer, who was responsible for the celebrations marking the restoration of the Bradenburg Gate and the opening of the Petronas Towers in Malaysia and the Rockfeller Center in New York. We have been further informed that a detailed programme of the celebration events will be mailed to each household and advertised in the media. On TV news it was stated that the budget for the celebration events is ‘somewhat’ smaller than the budget for the hard spend on the project. If this is not misplaced optimism when cautiousness is needed, than I don’t know what it is.
For goodness sake why do we have to make things so out of proportion? We are talking about a refurbishment and redesign of a city square not a multi billion project. Does it make sense to spend such out of proportion budgets on soft celebrations rather than on lasting hard projects? Or is this a mere attempt to build some feel good factor to mitigate the pain of the recession and to cushion the blow once the revised utility rates get announced?
Another one who went against the trend this week is Minister John Dalli who has accepted the Cabinet’s nomination for EU Commissioner. While many nationalist MPs are in silent, and not so silent, revolt for being kept out of a Cabinet post, Minister Dalli is moving out of Cabinet to take residence in Brussels. The next election will be the first one since 1987 he will not be contesting.
It would be wrong however to conclude Dalli is closing the door upon a return to local politics. We have had many instances of Commissioners who give up their post to take a new role in domestic politics if circumstances change. The latest sample is Lord Peter Mandelson who gave up his EU Commissioner of Trade appointment to take a high level Ministerial role in Gordon Brown’s cabinet where de facto he is considered as the second in command.
It is difficult to escape the conclusion that the Prime Minister’s motivation was more an upstairs kick than to reward Brussels with our best brains. But the move suits Dalli too. If the PN loses the next election he will not carry any guilt and would have the credentials to challenge for leadership of the PN once Gonzi probably decides he has had enough of politics or the other way round. If the PN wins, obviously Dalli will phase himself into retirement at age 66 after a five year stint as EU Commissioner.
What I will be watching out as we approach the next general elections is whether Gonzi will take steps to anoint his successor to block Dalli’s potential return and ensure that his move to Brussels is a one way trip out of Maltese politics. Interesting times await.
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