Wednesday, March 04, 2009

Ignorant About All The Wrong Things

President Obama said something revealing the other day:

On the other hand, what you're now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long-term perspective on it. I think that consumer confidence -- as they see the American Recovery and Reinvestment Act taking root, businesses are starting to see opportunities for investment and potential hiring, we are going to start creating jobs again.

"Profit and earning ratios" is not a term that comes up much among financially literate people. (Google it, and you find that President Obama's statement is the only thing that comes up.) Profits are earnings, and so that ratio would always be one. Or perhaps he meant profit ratios and earnings ratios, but in that case the two would always be identical, so he is being redundant.

He was probably trying but failing to repeat something he once heard someone say on CNBC or something, which is "price to earnings ratio," the price of a stock divided by its profits. This is a financially meaningful term, and people in the know often say that the historical range for it is between 17 and 20; anything above 20 is a priori overpriced, anything below 17 is presumably a good buy.

Who cares? When George W. Bush was running for president in 2000, a reporter tripped him up by asking him the name of the president of Pakistan, which he did not know. Now, this was clearly an egocentric exercise by the reporter, but it was fair game. Mr. Bush was bidding to lead the most powerful nation in the world, and that he be aware of the names, let alone the philosophies and personalities, of the leaders of the rest of them was not an unfair thing for the American people to expect.

So people could in fairness increase their personal probability that Mr. Bush was a man who didn't know much about the world. We are now in a position to increase the probability that the 47-year old community organizer we elected as president, a man who has never run anything other than presidential campaign and legislative staff organizations, who has never created a single private-sector job, is clueless about how the economy operates. He is, one might suppose, the sort of person who thinks that big declines in the stock market on his watch have no useful information to impart to him, and that wealth is a thing that magically falls from the sky for politicians to cut up and distribute to the grateful masses.

President Obama is a highly intelligent man; you don't get into and excel at Harvard Law if you're the village idiot. But being smart is no guarantee of anything. (See Theodore Dalrymple's recent piece, among many others, for the reasons why.) Being smart is not the same thing as being wise, and our new president appears to have no wisdom at all about finance, economics, and incentives. Right now, that is an underwhelming endorsement at best.

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