Swami Watch!

Swami Syndrome: A proclivity for predicting the future coupled with a blinding disconnect to the fact that a coin toss (or the proverbial monkey) would be more accurate than your lame prognostications.

There are lots of Pseudo Swami’s out there with Swami Syndrome!! Let’s see if we can distinguish between a bologna swami and the real thing.

We’ve got a Swami Sandwich filled with contradicting condiments with this first entry:

The Big Threat of Mortgage Credit Losses

On one side you have Swami Ben Stein. He loves to be on TV a lot which automatically puts him at risk for developing Swami Syndrome.

As you can see by that all knowing grin on his face, he may already be afflicted. But, maybe not, is he right?

Ben says, Subprime is a mess. But it’s a small mess.

Subprime mortgages account for roughly 20 percent of mortgages even in the most heavily exposed states. About 20 percent of them are delinquent in some way. That’s 4 percent of mortgages.

Of these, maybe half, or 2 percent, will go into foreclosure. There will be roughly 50 percent recovery on sale of these. This is a loss of 1 percent in the mortgage market — a sum the lenders have already made many times over because of the hefty fees on those deals. In the context of the size of the U.S. financial sector, it’s nothing.

And why should a crisis in subprime drive down stocks in Mexico and Thailand? Again, because the speculators seek to create panic to make money by selling short, and they sell short everything.

Spreading the Fear

In other words, it’s all the speculators trying to panic us so their sell programs will make money. And they’ll make money as long as they can spread their panic. When they can’t do that any longer, they’ll work the long side — and make up reasons for that, too.

In the meantime, the economy is strong. Profits are great, and interest rates are low and will stay that way. Don’t sell. With all the shrieking about the market, it only fell to what it was about five weeks ago — and we didn’t think we were poor then.

So Swami Ben is predicting that the Subprime debacle will not be the cause of an imminent recession. If we don’t go into recession in 2008 I think we would have to say that Swami Ben’s crystal ball was crystal clear on this one.

On the other side we have The Big Picture and Goldman Sachs U.S. economist Jan Hatzius. Swami BigP takes his first shot by bringing up the problem that derivatives pose to the subprime mess.

Its a rather foolish, overly simplistic analysis that ignores far too many other elements of the sub-prime slime. The pyramid of Derivatives built on top of them, for instance. It reminds me of an argument you might get intro with a child: “But daddy, the economy is so big and sub-prime is so small…”

and then he quotes Jan (too lazy to read all of Jan’s opinions so I can’t slap the Swami tag on him):

What’s different about mortgages is, in a word, leverage, he continues. Most stocks are owned by traditional investors, such as individuals, mutual funds, pension funds and insurance companies, who don’t use margin and don’t short. In contrast, most owners of mortgages are highly leveraged, including banks, savings and loans, broker-dealers and government-sponsored enterprises such as Fannie Mae and Freddie Mac, according to Fed data, which don’t count hedge funds.

This distinction makes a huge difference. If, say, these leveraged players account for $200 billion of mortgage-related credit losses, and they lever up 10 times, that hit results in a $2 trillion reduction in credit, Hatzius theorizes.

This would be a shock equal to 7% of total debt. Such a credit contraction could produce a large recession, if it happened in a short period such as a year, or a long period of sluggish growth — say, over two to four years, he adds.

And Swami BigP even goes on in another post to belittle Swami Ben by coining a new catch phrase:

I am starting a new campaign: Let’s replace the phrase “Tom Foolery” with “Ben Steinery.”

It’s clear to me that BigP is predicting a recession, caused mainly by subprime mortgage chicanery. Since we are already well into the subprime fallout, to be a sage like Swami, that recession would have to occur in 2008.

Let’s revisit this one in June of 2008 and see how these Swami predictions are panning out. Will the new catchphrase be Ben Steinery? or will it be Big Picturey?

UPDATE: Lo and behold, Big Picture turns out to be the Anti-Swami!! In his comment below he backs that up by directing readers to this terrific article http://www.thestreet.com/_tscana/comment/barryritholtz/10226887.html

This single line really highlights a theme of his piece:

No one truly knows what tomorrow will bring. Nobody.

That throws the harsh attacks on Swami Ben in a new light. Thanks for the good read!

-- Filed November 18, 2007 at 9:00 am