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I’ve been listening to and reading lots of financial pundits over the course of the past week—all of whom use the same lingo (the U.S. economy as the “cleanest shirt in the hamper,” the “deterioration in risk appetite” around the globe, and so on) and try to explain the volatility of the stock markets in terms of economic “fundamentals” (like the slowing of the Chinese economy, the prospect of deflation in Europe, and so on).

Me, I’m much more inclined to think of terms of uncertainty, unknowability, and “shit happens.”

Let’s face it: stock markets are speculative markets, in the sense that individual and institutional investors are always speculating (with the aid of computer programs) about how others view the market in order to make their bets—with fundamental uncertainty, unknowability, and the idea that shit happens. That is, they have hunches, and they have no idea if their hunches are correct until others respond—with the same amount of uncertainty, unknowability, and the idea that shit happens. And then all of them make up stories (using the lingo of the day and often referring to changes in the “fundamentals”) after the fact, to justify whatever actions they took and their advice to others.

That’s pretty much the view outlined by Robert Shiller. It’s all about stories characterized by uncertainty, unknowability, and shit happens.

In general, bubbles appear to be associated with half-baked popular stories that inspire investor optimism, stories that can neither be proved nor disproved. . .

the proliferation of such stories is a natural part of economic equilibrium. Successful people who value their careers rely on an instinctive sense for what pitch will sell. Who knows what the truth is, anyway?

As time goes on, the stories justifying investor optimism become increasingly shopworn and criticized, and people find themselves doubting them more and more. Even though people are asking themselves if prices are too high, they are slow to take action to sell. When prices make a sudden drop, as they did in recent days, people tend to become fearful, even if there is a subsequent rebound. With the drop they suddenly realize that their views might be shared by other people, and start looking for information that might confirm their belief. Some are driven to sell immediately. Others are slower, but they are all similarly motivated. The result is an irregular but large stock market decline over a year or more. . .

It is entirely plausible that the shaking of investor complacency in recent days will, despite intermittent rebounds, take the market down significantly and within a year or two restore CAPE ratios to historical averages. This would put the S. & P. closer to 1,300 from around 1,900 on Wednesday, and the Dow at 11,000 from around 16,000. They could also fall further; the historical average is not a floor.

Or maybe this could be another 1998. We have no statistical proof. We are in a rare and anxious “just don’t know” situation, where the stock market is inherently risky because of unstable investor psychology.

I would only add one correction: we always “just don’t know”—not just in anxious situations of volatility (such as during the past week), but also in more stable periods. In fact, we don’t even know if we’re in a volatile or stable period (until a new story becomes the common sense that what we’ve been through was volatile or stable) and we certainly don’t know how a stable situation becomes volatile (and vice versa).

Really, all we can say, when it comes to bubbles, is: shit happens.

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One of the major political parties in the United States still has one—and only one—economic policy: tax cuts.

But even one of their own, the new Republican-appointed director of the Congressional Budget Office [ht: sm], has cast doubt on the idea that tax cuts pay for themselves through higher economic growth.

Keith Hall, who served as an economic adviser to former President George W. Bush, made the pronouncement at his first news conference after the CBO reduced its 2015 budget deficit forecast by $60 billion.

“No, the evidence is that tax cuts do not pay for themselves,” Hall said in response to a reporter’s question. “And our models that we’re doing, our macroeconomic effects, show that.”

His comment is at odds with lingering economic theory from the 1980s that some Republicans still hold dear: Stronger economic growth generated by tax cuts would boost revenues so much that there is less need to find offsetting savings.

Even though major tax cuts in the early 1980s and early 2000s ended up boosting deficits while also propping up short-term growth, many Republicans cite the growth argument as a major motivation to cut tax rates as part of a tax reform effort.

Chart of the day

Posted: 27 August 2015 in Uncategorized
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Chicago

According to the Economic Policy Institute, a household in the Chicago area (2 adults and 2 children) needs $71,995 a year in order to attain “a secure yet modest standard of living.”

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Most households in Chicago clearly don’t achieve that level of income. Median household income in 2013 (the 2014 figures aren’t due out until September) was only $60,564. That’s just about the same as the amount of income a family consisting of 2 adults and 1 child would need ($60,674) to sustain a secure but modest standard of living.

To be clear: that’s in terms of the median. So, fifty percent of Chicago-area households bring in less income than that.

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