Learning from a Superstar

By TAN Kee Wee

(MediaCorp 938LIVE’s Money Talks, Thursday, 13 September 2007, 7.45 am and 7.20 pm)

In 1955, Luciano Pavarotti was 19 years old and training to become a school teacher. But after he and his village choir won first prize at the Welsh International Music Festival, he decided to become a professional opera singer.

Within ten years, Pavarotti had become an opera star. But no one then, not even his own father, could have forecast that he would one day become a singing superstar.

The turning point came in 1990 when, together with Placido Domingo and Jose Carreras, Pavarotti took opera out of the concert hall into the global stadium at the Soccer World Cup.

Now, with Pavarotti gone, recording companies are looking for his replacement. Many opera stars can be identified. But to identify a superstar, someone who has the sun in his voice like Pavarotti, this is something not many can do.

It’s the same in economics. It is always easy to project a current trend. But to spot the turning point in a market trend, ah, not many economists can do that.

For instance, last Friday, the latest US jobs report showed that the economy lost 4,000 jobs in August, making it the first jobs decline since year 2003. The negative report surprised investors who were earlier told to expect an increase of 100,000 jobs.

Like many forward-looking reports, the latest US jobs report does not always give an accurate picture. Like spotting the next singing superstar, it can be a bit of a gamble sometimes.

This is because the job numbers are subject to large revisions, especially at major turning points in the economy. The US jobs report is based on surveys of households and large businesses.

Sometimes, such surveys can be completely wrong. For instance, in the September 2005 jobs report, it was first indicated that 35,000 jobs were lost. This was later revised to an increase of 105,000 jobs. You can’t be more wrong than that.

This is not to say that we should ignore the latest US jobs report. There are other indicators which suggest a weakening US economy. That is why many expect the US Fed to cut its key interest rate next Tuesday.

Unfortunately, even if the Fed cut rates, it might not help much. Lower interest rates will lead to higher prices of many distressed bonds. But if your sub-prime bond is now worth half as much, even a few hundred basis points cut in rates will not make good your capital loss.

Lower interest rates are also not going to help those who are stuck with over-priced houses. Even if their sub-prime monthly payments are reduced, most owners can’t service their loans in the first place.

Lower interest rates are also not going to spur financial institutions to lend each other freely again. It will not bring down the interbank interest rates much, as long as financial institutions have little confidence in each other’s assets and loans.

Since the current crisis is basically one of confidence, Ben Bernanke’s job is now not just to cut rates. He must also say and do something to inspire confidence back into the markets.

Anyone can sing the aria “Nessun dorma” by Puccini. But only Pavarotti’s version can inspire and move us. It would be wonderful if, next Tuesday, Ben Bernanke does something to instill confidence in the markets the way Pavarotti does.

In the final line of “Nessun dorma”, Pavarotti summons from the depths of this world his confidence, with the victorious cry “All’alba Vincero!” This means “At dawn, I shall win!”