Sunday 28 December 2008
My Analysis? It’s Time to Stop Believing in Those Analysts
And I don’t care that there were one or two who actually forecast the financial crisis; if you have a universe of analysts who among them hold every conceivable opinion, then at least one of them will always be right at some point. Rather like the old saying that even a stopped clock tells the right time twice a day.
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My Analysis? It’s Time to Stop Believing in Those Analysts
Alan Alanson
28 December 2008
Nobody actually believes in Santa Claus. Sure, little kids accept that their gifts come from something called “Santa”, but once they are old enough to understand the whole magic sleigh, flying reindeer, Arctic workshop business, they too realise that the story is poppycock.
Strangely, the analysis that your average nine-year-old goes through to establish that Santa doesn’t exist would have saved Bernie Madoff’s investors a whole lot of money.
“How does he do that exactly?” being the obvious question.
And that’s what I’ve learned this year. When it comes to economics and finance, if I can’t understand the answer to obvious questions, it’s not because I’m stupid. More likely it’s because there are no answers. Or at least no good ones. And more important, just because someone looks as if they should know what they are talking about doesn’t mean they do.
Yep, 2008 has made a sceptic out of me, and I have now discovered that half of what I used to believe in has evaporated simply because I started asking “How do you know,” “How does it work,” or “Is there any evidence?”
So the list of things that I no longer believe in is a lot longer than it used to be. To start with, it obviously includes fund managers, the ones who didn’t think to ask Madoff the obvious questions that a nine-year-old would ask about Santa.
It also includes market analysts, that huge group of people who get paid to analyse exactly the same data, but consistently come up with completely different conclusions.
If you are a believer in a market recovery, there is an analyst out there, probably appearing on television this very minute, who shares your view. And there are of course analysts who believe the market is about to collapse, and then some who believe in a recovery in mid-2009, in 2010 or, and how many times have we heard this, that “we are in a bottoming process”.
If I wanted to know what was wrong with my car and every mechanic I talked to had a different view, I’d get pretty tired of the whole lot of them and probably buy a bicycle. And so that’s where I am with the analysts.
And I don’t care that there were one or two who actually forecast the financial crisis; if you have a universe of analysts who among them hold every conceivable opinion, then at least one of them will always be right at some point. Rather like the old saying that even a stopped clock tells the right time twice a day.
I also no longer believe in macroeconomics. Inflation, interest rates, money supply, exchange rates, deficits, inflation, all that business. Did it really do any good in 2008? Are governments really in a position to control or even influence the economic conditions in their countries?
Here’s my view on macroeconomics. The economy is like a baby: babies have a cycle of crying and not crying, just as an economy has a cycle of growing and not growing. You can never tell how long each cycle will last, but you know for sure that crying will turn into laughing and back to crying again at some point.
You use the tools you think will break the cycle. In the case of an economy, you change interest rates, alter taxes, or print money. If it’s a baby, you feed him, change him, wrap him in a blanket, play with him and so on. And when he stops crying you think that whatever you did last was what caused him to stop.
But you’ll never know if he was going to stop anyway. Just like the economy. The cycle will end and we’ll think we had some impact. Books will get written and economic theory will get revised, but it’s going to start crying again sometime whether we like it or not.
And finally, I of course don’t believe in Christmas. I am aware that there are several theories about its origin: it’s a winter solstice festival, a pagan celebration, or perhaps the culmination of the Roman week of debauchery dedicated to Saturn.
But right now it means listening to tuneless music in every lift and department store while fulfilling a strange cultural obligation to go shopping.
And if that’s not annoying enough, the whole thing somehow includes a bombardment of incongruous imagery of fat old men in red suits, or poor elves who didn’t make it into Lord of the Rings and got stuck in some freezing Arctic toy factory.
Having said that, however, I do believe in presents. And there’s one present that I want this year: the analyst I saw on TV this morning who thinks that the US government has used its macroeconomic tools effectively to end this recession, I want him to be right.
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