Monday, April 20, 2009

Don't Marry An Economist! - The Trouble With Economists

You can only listen to economists for so long. They are generally depressing. Have you ever seen a bullish economist? Start of a bull market for stocks, economists will be guarded and cautious. During the market's peak, the economists get more alarmist, warning of impending doom. When markets crash, they will say they told you so, and their prognosis is its not over yet. Deep into a recession, they will find more work and still say the worse is yet to come. When markets start a bull run, they will still be guarded and cautious - and that my friend, is as bullish as economists will get, guarded and cautious. Its very depressing to read an economist blog, worse, hear him talk. They look at past figures to project the future and somehow their projections are never bullish. Their famous lines during a recession, heck, even deep in a recession:

1. Things are still getting worse. They will seek out the negatives rather than look for positive. Even today, they will cite that industrial production just hit a 10-year low. Housing starts remain incredibly weak. Foreclosures ... are surging again. Can you imagine being married to one - the steak is too rare, too well done, was too expensive, not worth the money spent, too cold, ... imagine what its like in bed with them ... what do you expect, its called the diminishing marginal utility returns...

2. Some of the good news isn’t convincing. Even when face to face with good news, they will choose not to believe and trust them. Wells Fargo, for example, announced its best quarterly earnings ever. But ... reported earnings ... depend a lot on the amount the bank sets aside to cover expected future losses on its loans. And some analysts expressed considerable doubt about Wells Fargo’s assumptions... Meanwhile, Goldman Sachs announced a huge jump in profits... But as analysts quickly noticed, Goldman changed its definition of “quarter” ... so that — I kid you not — the month of December,... a bad one..., disappeared from this comparison.

3. There may be other shoes yet to drop. To an economist, there's always the other shoe to drop, I mean, how many shoes do we have, are we octopuses? Can we revisit the lows again and again? Well, commercial real estate is coming apart at the seams, credit card losses are surging and nobody knows yet just how bad things will get in Japan or Eastern Europe. We probably won’t repeat the disaster of 1931, but it’s far from certain that the worst is over.

4. Even when it’s over, it won’t be over. That's why I want to whack them over their heads with a club. They are still harping on things such as: the 2001 recession officially lasted only eight months... But unemployment kept rising for another year and a half. The same thing happened after the 1990-91 recession. And there’s every reason to believe that it will happen this time too. Don’t be surprised if unemployment keeps rising right through 2010. ... Employment will eventually recover... But it probably won’t happen fast.

You need to know that an economist WILL NEVER BE ABLE TO TELL YOU WHEN A BULL MARKET HAS STARTED, they are too busy looking for negatives. The entire subject of economics is a historical study of facts and figures, ever met a joyful historian? The subject of economics and its training naturally turns out skeptics. That has been their strength and their main downfall. They are killjoys.

For all their commentary on financial markets, how many economists are there in the richest 1000 in the US? None, I believe. In order to do well, get tenured as a professor. Over the last ten years or so, with the popularity of business books and the advent of the internet, we have a new breed of economists surfacing. Still pessimistic, still pragmatic, but increasingly vocal. In order to stand out, they need to shout louder that the disasters are bigger and more severe - economists are like seismologists, they look for disasters, they are not research scientists, they will never shout that they have found a cure for cancer or patched the genome of .... (you fill in the blanks). Hence to be noticed, to get that book deal, to be quoted by the news sites, you have to say the more extreme things.

They will never tell you when to buy, because they themselves don't know when to buy. They will tell you when to sell, they only have sell now, sell more now, be cautious, sell everything, sell some - and that runs the gamut of their advice to us. If you take only one side of the equation, you will eventually be right, just like Marc Faber or Jim Rogers.

My main gripe is that we also know when the economists will finally say its ok to buy some stocks, ... when the Dow has just breach past 10,000 ... what effing use is that?

The entire market place encourages them to be pessimistic. In markets, it pays to be negative, because when markets fall, they will recognise your calls. If markets turn bullish, they players are so happy anyway, they will forget you ever called for a prolonged bear market. And, thats how the game is played.

p/s photos: Coco Jiang


Gamelion said...

It's sure look poison to certain people but look like very sweet honey to another ! Dont forget in this pessimistic outlook there r some fun management that profit out from this situation .

hishamh said...

My wife married one :)

I don't blame you for your rant, but at a guess, I think you've been dealing with a small subset of the profession - financial economists. The fields of study within economics is much, much larger than that, even if financial economics tends to be the most highly visible and vocal.

Secondly, most economists have received enough training in statistical methods to realise the degree of uncertainty in forecasts, hence the equivocation.

Despite the fact I work in the financial industry, I continue to find it exceedingly strange that economists are involved at all in financial market commentary - except in the very limited sense of understanding how and why it works and its larger impact on the economy and vice versa.

I also find it strange that people expect economists to make forecasts for financial markets, when they are definitely not qualified to do so.

There's little in an economist's toolkit that allows for such forecasts to be made, much less call peaks and troughs. Where models exist, they always involve variables that are unobservable, such as market (forward-looking) expectations of corporate income and dividends. Also, the relationship between financial markets and the real economy (which economists are qualified to talk about) is tenuous at best.

You should recognize that economists making financial market forecasts are punting as much as anybody else.

Such things are best left to the professionals, such as yourself.

clk said...

IMHO, there is 1 major flaw when we all study economics, which is to assume humans are rational beings.

We all know humans are seldom rational.

With this assumption in the drain, I wonder how will we ever understand economics as human behaviour is the cornerstone in economics.

How does one talk of supply, demand, interest rates, forex rates etc. without contemplating human behaviour?

Moolah said...

LOL! Now this a great rant, my dearest Dali. :D

But there is part that I do not agree.

"You need to know that an economist WILL NEVER BE ABLE TO TELL YOU WHEN A BULL MARKET HAS STARTED, they are too busy looking for negatives."

Well you know Dali...

If one does seek such info/knowledge/advice from an economist, then they are probably much, much, much better seeking investment advice from Auntie Too. :p

ps: stop kambing-ing la.