With all the bloviating (hot air) coming out of Davos, brought to you by the ones who didn’t see the crisis coming and then lead us into it) I thought this might be a good time to revisit the view of “experts” and how we must take what they say with a silo full of salt. I’m specifically thinking of analysts and economists, but it holds true for all the other fields where “expert advice” is thought to come from on high. I will here present one small example: Art Critics

Despite being the battle cry of the bad artist, it is true all art subjective, just as looking at data points is in the eye of the beholder, especially if he is “talking his book.” I don’t expect them to tell me if they are right, for if they were they would have Buffett-like wealth and have no need to talk to peasants like me. But I do expect themto give me insights or points of view that I hadn’t previously thought of.

In 1964, Swedish art critics were fooled into praising the works of one Pierre Brassau, with descriptions such as, “Brassau paints with powerful strokes, but also with clear determination.His brush strokes twist furious fastidiousness Pierre is an artist who performs with the delicacy of a ballet dancer:”

And what were Brassau’s methods?He “preferred eating the paint rather than place it on canvas.” Why? Because Brassau was damn CHIMPANZEE!

And so it goes. Which leads me to some further thoughts concerning a most interesting week in the international area. Regarding Japan, for instance, the “experts by and large dismiss the possibility of hyper-inflation in a country that has been fighting a losing battle with deflation for the past 20 years. They go on about the homogenaity of the population and its propensity to save. Therefore, inflation, and the bang on effect on the US dollar are ignored.

But Japan has fewer workers paying for increasing debt levels. The great savers are drawing DOWN their savings. Keep in mind it was only last week the pensioners of Japan Airlines agreed to a 30% decrease in their pension payments. Japan’s debt-to-GDP are at levels so shocking you would think they are talking about Zimbabwe. The largest buyer of Japanese debt, the postal system, has said they are now net SELLERS of JGB’s. To finance all of these “road to nowhere” projects, the government will have to pay higher interest costs they can not afford. The yen, once the safe haven of the carry trade crowd, will be crushed. Japan is the second largest holder of US debt. They will be huge sellers of these securities. This will bode poorly not only for the yen but for the greenback.

So the conventional wisdom here could be massively wrong. They are whistling past the graveyard. Everyone will be demanding higher yields, and the cycle will be vicious. The worst part is that Japan can do nothing to help itrself.

Which leads me to China, as long as we are in that part of the world. The economic problems of the world are so deep and institutionalized that only China can save us from the inevitable. Thus you hear more silliness (and sotto voce) prayers about China and the other BRIC countries than ever. But something is not right. Here’s one (of many) examples.

While Chinese GDP rose from 7.9% to 10.7% , the NOMINAL shot up from 4.0% to an astounding 26.9% in the same period. This implies a 417% increase if one uses the methods of Americans.

Additionally, the GDP deflator rose from from a NEGATIVE 3.6% in the second quarter to a POSITIVE 14.5% in the 4th quarter. And this is despite the fact commodity prices (and Chinese imports) went from minus 40% to plus 50%in the same six months. Remember, the DEFLATOR went DOWN,

What’s going on? Well, the Confucio-Maoist desire to generate a respectable rate of return to show the unwashed masses they are in total controlof the ship has instead given rise to the rather embarrassing clash with numbers that the government ITSELF had published only a few quarters ago. Truly, this is Alice in Wonderland.

I return to one of my gurus, Nassim Taleb. “It is particularly shocking that the people whowho do what are called “stress tests”by taking the worst possible past deviation as an anchor event to project the worst possible future deviation , not thinking they would have failed to account for such deviation had they used the same method on the day before that past anchor event”

This is why models, quants, etc are essentially immune to “tail risk”.

Oh, and don’t worry about Greece. It’s marginal at best. But do be concerned about Spain, the 4th largest economy in the (disintegrating) EU. It has banks in worse shape than Greece, higher unemplyment (44% of under-25′s) and much of the fiscal power is held by autonomous regions, where the government has no say whatsoever.

INFLECTION POINT: I believe one was reached this week. There was no bad news since theMarch lows; there is no good news now. For those who follow this stuff, 200-day moving averages were breached in several stock indices, including the BRICs.

Friday was ugly. It should be aninteresting week. Stay tuned

Chuck Karasick