I have a few conferences coming up later this summer, and as part of one event, I was asked a series of questions in advance. Its a pre- interview, and I figured I would work my way through the questions a little bit all week.

But then I read the first question — the headline of this post — and it gave me pause. It is a fairly standard query, but always makes me want to shake the reader out of their stupor, shift their perspective in an entirely different direction.

Why?

Because the answer people want is very different than the answer they really need.

So I will attempt to answer the above inquiry three different ways: Direct challenge,  a Socratic query, and discussing the present (not future) state of the markets/economy.

Direct:

1) I do not think my opinion as to the future state of the economy or where the market might be going will be of any value to your readers. Indeed, as my regular readers will tell you, I doubt anyone’s perspectives on these issues is of value. Here are 3 quick reasons why:

First, we have learned that you Humans are not very good at making these sorts of predictions about the future. The data overwhelmingly shows that you are, as a species, quite awful at it.

Second, given the plethora of conflicting conjectures in the financial firmament, how can any reader determine which author to believe and which to ignore? You can find an opinion to confirm any prior view, which is a typical way many investors make erroneous decisions (Hey, that agrees with my perspective, I’ll read THAT!)

And third, relevant to the above, studies have shown that the most most confident, specific and detailed forecasts about the future are: a) most likely to be believed by readers and TV viewers; and b) least likely to be correct. (So you have that going for you, which is nice).

Socratic:

2) Questions:

• Why do you care about my — or anyone else’s outlook on the markets or the economy? Is that possibly of any value to anyone?
• Has anyone ever answered that question in a way that did anything other than fill airtime or page space?
• How will anyone’s opinion about the future help your investors? What’s the track record of these forecasts? Can you tell in advance which predictions will be right or wrong?
• Why is it that you believe than any single person’s opinion will be of any significance?
• Across the spectrum of possible opinions, forecasts and outlooks, someone is going to be correct — how can you tell if it was the result of repeatable skill or merely random chance?

If you answer these questions yourself, grasshopper, you will find the answers you seek.

Present state of the markets/economy:

3) I think it is of much greater value to be able to put the current situation into broader context, via a variety of variables and factors, than make guesses about the future.

We are currently in a post-credit crisis recovery. History shows us these last about 10 years, typically show a weak GDP and slow job creation.

Monetary policy in general can help with liquidity — reducing the odds of another credit freeze up — but can only do so much to improve Employment situation and GDP. To move the needle with that requires a Fiscal response, one that is unlikely to occur given the dysfunctions of Washington D.C.

Compare this with say the fiscal response to the crisis out of Germany, and what it has meant for their GDP and employment situation, and you will better understand what is possible versus our foolishness.

As to the markets, I hope you realize they are separate and apart from the economy. The data overwhelmingly shows that most of the time, stocks and economy are wholly uncorrelated. Over the short and medium term (days weeks months), there is almost no relationship in either direction or magnitude. People often have difficulty accepting that, but the academic studies on it are overwhelming. Over the longer haul (decades), there is some correlation between GDP growth (3-4%) and corporate earnings (6%), and I assume they are not coincidental. But that is only over long periods of time, and even then they can become somewhat disconnected.

Frame of reference is very important. Currently, we have recovered the entire losses from the 2008-09 crash. Looked at from the March 2009 lows, we are up about 146% over 4 years. Looked at from the October 2007 highs, we are barely up a few percent over almost 6 years. And the Nasdaq is still 40% or so below its March 2000 highs, some 13 years ago.

Markets are neither cheap nor expensive. The psychology out there is that the public remains wary — of everything that burned them over the past few years.

I believe many factors are leading to a sort of delegitimization of investing. Everything from lack of prosecution of bankers to HFT are causing the public to turn their collective backs on stocks. Usually, a bull market will end this disregard.

No one is happy with these answers. They are not what they want to hear, but often what they need to hear.

 

Category: Economy, Financial Press, Markets, Philosophy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

27 Responses to ““What’s your outlook on the markets and the economy?””

  1. denim says:

    Barry, isn’t their underlying question “how good is my opportunity to make money in this market and economy?” And I think you have told us once, twice or so

    http://www.ritholtz.com/blog/?domains=http%3A%2F%2Fwww.ritholtz.com%2F&sitesearch=http%3A%2F%2Fwww.ritholtz.com%2F&cx=015905226837203657063%3Ax1cwdcykvvw&ie=UTF-8&oe=UTF-8&cof=FORID%3A11&s=Search&q=investing+rules

    Just do it.

  2. PeterR says:

    Very well said — thank you.

    This is exactly what I needed to hear.

  3. Robert M says:

    What makes you valuable is not whether your opinion/prognosticians are correct but that you give people things to think about. Unfortunately you post things like this in regard to fiscal policy, “fiscal response to the crisis out of Germany”. It leaves me w/ this comment, STOP MAKING SENSE!

  4. peterkrause says:

    Excellent topic. What is absent from the discussion of our current state of affairs is a nod to the political side of things. Our policymakers are playing with fire by not doing anything. They are driven by fear and lack of understanding and above all else crave unlimited continuation of their collective and individual stati quo. Only until pushed by by crisis will they act, and I mean literally not until the wheels of the locomotive are about to repart their hair. Its Bernanke against Congress and they will wreck it before they get it right.

    • I’m not sure I’d agree there is an absence of politics in things, especially economic/finance related . . .

      • Willy2 says:

        Au contraire, I would argue that there’s A LOT OF involvement by policymakers. And I am not convinced that this involvement actually benefits the country. In a number of cases they make things actually much worse.

  5. DeltaV says:

    Barry – Very much agree with your thoughts. Would like to add though, that even though the bulk of financial reporting is meaningless from the get-go, in the sense of having little to no predictive value on the value of investments, it is still done very poorly.

    But maybe I’m looking at this the wrong way. Maybe (as suggested in a brief spurt of honest articles in early 2012) the financial reporters already realize that they have no understanding of what moves investments… and so why should they even do the research? It is only a hop-skip-and-jump from this position to ignoring reality altogether and just writing any opinion that occurs to them (or to their financial sponsors). Which explains a lot.

  6. Willy2 says:

    This german “Kruzarbeit” is, as far as I know, subsidized by the german government(s). I know it has been the case in other european countries as well.

  7. Greg0658 says:

    I’ll play this game also – as I am a glutton for punishment
    I’m on hold waiting for my phonebook bagging helper .. to finish this game I play yearly for about a decade (show I can still be a paperboy and got it going) I fell and broke my primary wrist backpeddling from a dog on a leash in a driveway (gonna cost me 10X what I would have made) (1st break ever) but somebody has to throw pebbles in the water and make waves (ebb tides)

    I’m wondering on the flows of finances in these United States > this “pig in a python” boomers retire’g and folks living longer due to technology / at the same time that technology remove’g the need for them. We all know this “stuck between a rock and a hard place” phenomenon. Its the dealing with that I’m wonder’g how this all works out.

    I am hearing this meme momo “the most important thing in life is the ability to earn a living” .. that takes health, the right smarts, ability to move about and an OpSys that is working.

    Its the ratios of: population to work to expendable survival supplies > KISStupid .. and remiss to skip this game we play telling stories (and its called GDP too).

    Thats enough story telling – shoe tie’g and pants button’g is a chore for me alone – takes a bit more effort after last Thursday.

    • Greg0658 says:

      more directly with less story .. from BR’s startup “we have recovered the entire losses from the 2008-09 crash” * .. yes but we are talking stock ticker values not values after withdrawn (cashed) to use said cash – (don’t need to tell this crowd but will) the stock value will fall as the healthy corporations seek to buy themselves private * with their cash stores – with the founders arriving near the end also – to own a piece of a future job provider & rentier

      stocks & bonds dualing novas is over my head – how that universe wins & looses – ummmm

      I always played life as “money is just scratchy tolietpaper – turn it into something more fun” – that was fun – but now the stuff collected ? in a hunt & gather world ?

      my gut says there aren’t enough kids playing this game for the withdrawl – and then I wonder what our world will be like when there isn’t enough to go around .. I think we’ll get our animal spirits real demand – hense find a gated self supporting kingdom – bring a copy of “the Outsiders” for the PonyBoy in the crowd (got it covered)

      *coda – the QE pump floats boats and may be fine but I see inflation in phoney jobs and birth rates which floats boats .. my main qualm – is aligned parents – teach your kids to grow up to be socs .. Conan what is best in life ? to earn much for doing nothing / (thats not what he said)

  8. Katya G says:

    More Socratic: why do you think that x and f(x) are the same? End of QE does not necessarily mean end of the world. Do we give too much weight to what’s going to happen after some event?

  9. resuscitate says:

    Separtate stock market and the real economy.
    Distinguish between speculating and investing.
    Speculating is short-term; investing is long-term.
    Bull market based on easy-money speculation will not move the money from the sideline.
    Sideline money wants investment not speculation.

  10. leopardtrader says:

    You can have a view about the future. Be it economy or markets. Yes you could be wrong but more right than wrong to be taken seriously. Everyone plans against the future. That is the reason people go to school to acquire trade or knowledge to be able to navigate the already anticipated future. Now this is different from dreams lol

  11. 4whatitsworth says:

    Agree the Markets and the Economy are disconnected. You can raise profits without raising revenues.

    My view of the economy is that we have serious structural and social political issues that will keep us at a flat growth rate adjusted for the real rate of inflation for a long time. Currently the Fed is not going to do anything until the tax hikes are fully understood.

    An interesting observation is that I am currently making more money in stock market than I am in my small business and that is just not a good sign.

  12. Pantmaker says:

    I think history will show the unprecedented level of monetary meddling in markets will prove more disruptive long term than is currently expected.

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  14. ZevCapital says:

    Comparing the economies of Germany and USA is “apple to oranges”. Not only is Germany an export driven economy, but the USA is 25% of the world’s economy.
    During the crisis, USA asked EU to join in stimulus, the Germans blocked it. Germany benefited from USA stimulus (export economy) without risking anything. This allowed them to keep full employment and avoid recession. The question is, will this short-term solution actually harm them in the long-run. I think it will.
    Have things become so turned upside down that “creative destruction” is a bad word? Despite all the rhetoric, I think we will find out that the USA is only ONLY capitalist economy in the world, and has been since 2008.

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  16. winstongator says:

    I disagree with your idea that opinions on the pulse of the market are not worthwhile.

    I nearly moved back to Florida (Northwest Broward) in 2007, into a home that then cost ~800k and would now sell in the low ~4′s. And would have left a good job where I’m at, assuming my skills would have transferred well to that locale. In that time, my wife and I have accumulated a level of savings that would have been wiped out by our property purchase at that time. It wouldn’t have bankrupted us, but would have taken us from a ~500k net worth to break even. My hesitance, reinforced by some housing bubble blogs, was based on the unsustainability of Florida home prices. Being conservative in my own job prospects helped too. Riding out a year or two looking for a great job would not have been fun). Now, had I listened to Kudlow & friends, or the NAR, I would have doubled down and gotten an even bigger home in FL. I don’t think the well placed pessimism of 2007/8 was just luck.

    For today, I’d say that home prices in most areas will level out and stop rising. I would tell others to not expect another 146% increase in stock prices (Dow 37,500 here we come?), but I would not expect a 50% loss like 2007-2009 either.

    • So your anecdote is that you listened to one source (over another), but you got lucky. The problem is you could have just have easily listened to the wrong sources . . .

      • winstongator says:

        Some analysis is better than others. Kudlow was putting politics ahead of fundamentals, and the NAR were talking their book. When you eliminated those types of analysis, there was very little saying housing was sustainable. BTW, you are one who explicitly tells people that those are two major flaws of many analysts.

        I read recently (maybe from one of your links) that is is easier to eliminate stupid decisions than to always make smart ones. But if you limit your stupidity, your overall progress is much higher. Could the same apply to advice? Weed out the stupid, or having certain flaws, then look at the rest. You get a much different picture than if you just look at the whole noisy world of economic analysis.

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