Sometimes Consensus is Not What We Want

In the last few days we have had a remarkable consensus develop at the national level. Harry Reid, Nancy Pelosi, and George Bush seem hellbent to create a stimulus package to resolve the economic "crisis" facing the country. Remember this is the same group of politicians who a month ago seemed in permanent divergence. Excuse me if I am a bit skeptical.

There are at least three reasons why I am bothered by this new policy comity (no I did not misspell here):

1) Until you understand what the problem is it is probably not a good idea to devise a solution.
The financial markets in the last several sessions have been in a tizzy but besides the mundane explanations that we've heard about the mortgage meltdown, it is unclear why they have been in this state. Today's session was a good example - for the first time in several days we ended with an up session but in mid-day the session was down by an almost equal amount. There are a lot of things to be jittery about but there are also some good signs. There are lots of possible explanations about what we should be paying attention to - the housing meltdown, the disruption in the commodities markets by increasing demand from developing nations, terrorism, and many others. Until you understand the source it is hard to figure out a workable solution.

2) The evidence is that most stimulus packages are either too little too late or more likely too much too late.
In the last 24 months we have brought down the federal deficit through some growth, some tax revenue growth and some restraint (mostly the first two). Unemployment and inflation are in pretty good shape. There are some deep pockets of housing foreclosures but as you look at the map - those are localized. All of the talk contemplates a generalized response.

In addition, the politicians have not thought enough (new thing!) about whether the existing responses have begun to turn the trend (whatever the trend is). The first jolt was the Fed's panicked reaction on rates yesterday. The initial response of the markets was that it was not enough - although calmer heads seem to have begun to prevail. But the risk that Congress will take this Spring Christmas package and ornament it up are enormous. If Congress can act quickly then the infusion of $150 billion into a $13+ trillion economy might have a small effect but it is more likely to have an effect on the government - which will momentarily run up the deficit numbers. But the politicians think this will be a feather in their cap - so it does have some rent seeking benefits, at least to them that proposes it.

3) What George WIll originally described as "economic hypochondria" is something we should be wary of.
Warren Buffett has a great analogy that he has used in his annual reports for Berkshire Hathaway called "Mr. Market." (It is also presented in legendary Columbia finance professor Benjamin Graham's The Intelligent Investor.) There are several places on the net that describe this idea. Here is one from Wikipedia- Mr. Market is "an obliging fellow who turns up every day at the share holder's door offering to buy or sell his shares at a different price. Often, the price quoted by Mr. Market seems plausible, but sometimes it is ridiculous. The investor is free to either agree with his quoted price and trade with him, or to ignore him completely. Mr. Market doesn't mind this, and will be back the following day to quote another price. The point is that the investor should not regard the whims of Mr. Market as determining the value of the shares that the investor owns. He should profit from market folly rather than participate in it. "

One of the significant dangers of the 24/7 news cycle is that all of the financial commentators believe they need to fill the time. So we get a seeming broad array of commentators who actually listen to a small number of sources. Thus, while there are differences between Lou Dobbs and Jim Cramer - to take two extremes - both are centered on a New York point of view. So we have constant data but not more useful information.

For my money, caution is important here. When was the last time you had a politician start with that principle?