StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

"Uncertainty" Is Nothing More Than Wall Street Whining

21 Aug 2012
Posted by Stan Collender

It's time to have an honest talk about "uncertainty" -- the B.S. complaint by Wall Street and corporations that they don't know what's going to happening in Washington; don't, therefore, know what to do; and are sitting on their hands and cash rather than (take your pick) expanding, hiring, investing.

Look, for example, at this story by John Melloy at about the latest from David Kostin at Goldman Sachs. In talking about the fiscal cliff, Kostin is quoted as saying, “We believe the uncertainty is greater this year than it was 12 months ago.” Because of that, he urges investors to get out of equities before the fiscal cliff hits, could hit, might be settled, or...well...Kostin/Goldman Sachs doesn't really know, that is, they/it are "uncertain."

First, as Melloy relates in his story, Kostin's analysis of the situation is right on the mark. Investors that think that economic rationality will rule the day as the fiscal cliff gets ever closer could be very surprised and lose money as policies are put in place or allowed to happen that are different than what they expect. As Kostin notes, last August's cliff-hanger fight over the debt ceiling should convince anyone who's watching what's happening now that there's no guarantee a deal will be cut, a rational agreement will be reached or the Democrats and Republicans, House and Senate, and Congress and the White House have the ability to deal with tax, spending, debt and deficit issues in a timely manner.

But to bemoan the uncertainty as immobilizing and make it into its own issue is disingenuous if not completely deceitful. It's time to call it what it really is: Wall Street Whining.

Here's why.

1. When isn't there uncertainty facing Wall Street about what's going to happen? Whether it's weather, Geo-political, economic or political, uncertainty is one of the most basic elements of capitalism and free enterprise.

2. In fact, it's one of the first things you learn on your first day in Econ 101: Uncertainty -- that is, the lack of perfect information -- is one of the things that drives markets. If everyone knew...or assumed...the same thing, there wouldn't be different investment strategies, alternatives, funds or trading. Everyone would want to buy or sell the same things for the same price. In other words, for all the complaints about it, without uncertainty Wall Street wouldn't exist.

3. For all its whining, Wall Street doesn't really want certainty unless it's a guarantee that what it wants will happen. Would it feel better if a decision were made on Capital Hill right now that the Bush/Obama tax cuts will expire on January 1 and that the sequester spending cuts won't be changed, that is, if the uncertainty were completely taken out of the system?

If it can't get certainty that what it wants will happen, Wall Street seems to be happy to work with the notion that what it wants might happen. In other words, in the current situation, uncertainty about the fiscal cliff could actually be far preferable to certainty.

4. Much of the uncertainty about the current situation has been caused by Wall Street itself because it doesn't want most of the fiscal cliff policies to go into effect. If Wall Street was willing to let all of the spending and taxing changes happen, it could know four-plus months in advance about the future and, therefore, completely eliminate all of the fiscal cliff-related uncertainty.

The fact that Wall Street isn't doing this tells you all you need to know about the charge of "uncertainty": Its a phony issue that should be dismissed out-of-hand.

Fiscal cliff

Agree w/ whining analysis

Fiscal cliff is like Y2K worries - what a crock - another Acorn from the Chicken Little Institute of Dubious Science

Not sure what you mean by

Not sure what you mean by "disingenuous/deceitful". Well known economic theory (sometimes called real options but the basic idea is pretty ubiquitous) shows that when there is a major source of uncertainty that will be resolved imminently, those facing that uncertainty will be more likely to opt to wait/be as flexible as possible until that uncertainty is resolved. It's really the imminent resolution more than the uncertainty itself that creates the "option value of waiting".

Uncertainty happened when the

Uncertainty happened when the Bush tax cuts were set to expire. Uncertainty happened with the mid-term elections. What uncertainty? It is always uncertain regarding the future. And now uncertain with fiscal cliff? Uncertainty is BS.


While there is certainly something uncomfortably squishy about the concept of uncertainty, we can actually quantify its impact on the economy so long as we are careful to define what uncertainty means. If we take, for example, the VIX as the starting point then we can find statistical evidence of its impact on activity. We do this below. Suffice it to say, given the near record low readings of the VIX, uncertainty is nowhere near high enough to make a difference. Hence, we should look at other factors to explain the moribund growth levels.


Break the Capital Strike

I can accept that uncertainty is a significant current factor in investor decision-making. But if private capital is really paralyzed with diffidence over the outlook for private enterprise, and determined to huddle and clutch its pearls on the sidelines - or even worse stage a capital strike until they get the kind of corporation-friendly government they want - then we need to tax a lot of that capital away and invest it ourselves in public enterprise. Governments don't need certainty - only the will to act.

"Uncertainty" Is Nothing More Than Wall Street Whining

Wall Street is not a handful of 1%-ers. Maybe influence peddlers abound, but the billions taken out of equity mutual funds and equities themselves is done largely by millions of ordinary people. Are they whining? Personally, I think they are scared out of their wits by the B.S. in Washington more than by a volatile stock market.

Wait, isn't that what they get paid for?

Last I checked, the claimed reason that Wall Street was worthy of hoovering up an ever-growing share of GDP was that they "take risks" and "deal with uncertaintly". If they want to whine about it so much, perhaps they should consider a different line of work...

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