TCS Daily


Profits or Pundits?

By Jerry Bowyer - August 30, 2006 12:00 AM

Who teaches you more, pundits or profits? That's the question I asked myself every time I saw a talking head on cable TV during the month that was the Israel/Hezbollah crisis.

Head-after-head made case-after-case that it contained within in it the distilled wisdom of the mysterious aggregation known as the 'Arab Street'. Do these guys even speak Arabic? I wondered. Don't get me wrong, my own Arabic vocabulary is about five words, and three of those are foods. But then again, I'm not a Middle East pundit, nor do I play one on TV.

One type (of talking head) told me that Israel was fully justified in what they were doing. They seemed relieved that finally someone (Israel) was taking the gloves off in the war against terror. The other type said that Israel was destabilizing the region with their counter-attacks against Hezbollah. They focused on civilian casualties in Southern Lebanon and used words like "disproportionate".

After the cease-fire agreement was announced, the sides swapped moods. Doves: Happy. Hawks: Angry.

When I want to know what the people of a region are thinking, I look at two things: short-term capital flows and long-term migration. The two most important votes that a man can cast against his rulers are when he votes with his feet or when he votes with his nest-egg. Usually, he does it in the reverse chronological order.

Since long-run migration patterns after the crisis will not be available until, well, the long-run, we should look at what capital markets are saying.

I've taken a cross section of large, publicly traded blue chip companies that do business in Arab countries. This group, dubbed, "The Arab Titans Index," is composed mostly of banks and utilities. Then I synced it with a time-line of the major attacks and counter-attacks of the conflict.



The results were shocking. Shocking, that is, if everything that you know about the conflict comes from talk radio and cable TV.

When Hezbollah was taking the initiative, Arab companies fell. When Israel hit back, they rose. The harder Israel hit, the faster they rose. You'd expect the Israeli markets to act this way (which they did), but the Arab ones too? You see, Hamas and Hezbollah are not just threats to the Jews; they're threats to the Arabs. In fact, they do more damage to the latter than to the former. They represent the political and social chaos that keeps the money of the first world from flowing into the third world. The natural conflict is not between Arab and Jew, it's between civilization and chaos. By this measure, Israel didn't destabilize the region; it re-stabilized it.



But the markets have a surprise for the hawks, too: They liked the cease-fire. The incredibly complex web of information that constitutes the decisions of the customers, managers, and shareholders of the Arab Titans concluded that Hezbollah's actions were bad for business. Likewise, they concluded that Israel's counter-attack was good for business. Finally they came to the conclusion that it once Israel achieved on the battle-ground as much as could be expected it was time for the war to come to a conclusion, too.

Almost nobody was saying this in the world of talk. People who were happy that Israel was hitting hard were upset when it stopped, and vice versa. But markets are practical; they don't have a shtick or an image or an ideology. They don't have to be predictable enough to be a reliable guest on Hannity and Colmes. In other words, because so much is at stake, they have to be honest.

Jerry Bowyer is an economic advisor for Independent Portfolio Partners and a TCS Daily contributing writer.

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7 Comments

The prophet motive
Good article and it's kind of like saying as muslims kill more muslim than infidels ever have; likewise muslims do more damage to their own economies than the Israelis(or any other infidels do). So this is another article pointing out what losers most middle east muslims are. The only exception is Dubai which I admire.

Sheer profundity
You can't beat this think-piece for sheer distilled wisdom. When a country becomes transformed into a war zone you see capital flight. Then when a cease fire is declared, the money starts to come back.

The corollary is that peaceful, prosperous places become magnets for job seekers, while war zones find the population fleeing for safety.

Where do you get this stuff, Jerry? This is terrific.

look closer beaner
The rise did not start with the cease fire, it started when Israel started hitting back, hard.

A nice concept but this draws a heap of conclusions from very little data
I'm too lazy to do it, but I imagine I could take a few days trading results of an number of selections of stocks and prove just about anything you would care to want proven.

Nice Work Jerry
What a great way to look at this Jerry. So if all these big corporations wanted to see there stock go sky high, they would support an Arab crackdown on terrorist.

Confusing correlation w/ causation
I remember a class in econometrics where the professor illustrated the danger inherent in plotting one variable against another and assumning there was a logical relationship.

The example was elementary and secondary school teacher earnings, which are inversely related to temperature-but only because most places pay over 9 months and have a summer vacation. Caution applies with "confusing correlation and causation"

Sheer idiocy
You're telling me that international investors started puring money into Lebanon once they heard that Israel had begun demolishing the place.

Prove it.

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