On Scholasticism

I have to confess, that as a mostly self taught investment advisor- and by “self taught” I mean I've consumed thousands of pages and dozens of books on this subject without having a degree in economics, that I've nursed this nagging feeling of inferiority compared to those with their Wharton and Harvard Business School degrees.

So why, after being educated to within an inch of their lives, do they get it so fantastically wrong?

In my year end summary, I remarked:

"I've had some debate with commentators about how much the drop in gasoline prices will spur consumer spending. My belief is that it won't do much: if over $5 trillion in mortgage refinancing didn't set off a consumption boom, it's hard to see how saving $8 on a tankful will. But it's a theme so many analysts repeat without even thinking about it. For lower income families who spend a larger percentage of their income on fuel, it's certainly a welcome development."

But nothing could stop the drum beat of higher expectations in retail sales due to lower gas prices. This, according to one analyst, was a “bonanza.” Respected analysts like Diane Swonk of Mesirow Capital couldn't stop hammering at the theme. A parade of the usual Wall Street talking heads kept at it, and it seemed that almost no one wanted to question this line of thought. And no doubt, they placed their clients' money on the “come” line for this.

“We could have a blowout period for consumer spending in December, which gives the economy momentum going into 2015,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who correctly predicted the gain in retail sales. “The oil glut is a boon.”

Well, the retail sales stats for December came out. In a word, they were disappointing. The sector sold off.

This is what the economist John Maynard Keynes warned about when he cautioned young economists against “scholasticism.” He urged students to learn more about the real world instead of relying on charts and graphs. Anyone whoever changed an oil filter, could figure this one out:

15,000 miles driven per year, at an assumed 20 Miles Per Gallon, gives 750 gallons consumed. Even at a dollar a gallon off the price, how was $62.50 a month going to spur the U.S economy to an orgy of consumption?

So what got them all excited? Well, there WAS this chart in the Wall Street Journal that showed that as a percentage of income, the bottom quintile of wage earners spend a fair amount on gasoline.

Unfortunately, the chart didn't show that this bottom quintile also lives paycheck to paycheck, has no savings whatsoever, lives in fear of job loss, and carries an average of $6000 in revolving credit card debt.

"In 1933, he observed that scholasticism could 'precise everything away, leaving a "comparative poverty of meaning.' These views are in stark contrast with that of modern mathematical economics, the general presupposition of which that higher degrees of technical sophistication leads to greater explanatory power, not greater emptiness."

Wharton can teach you a lot. Just not that much about the real world.