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

Posted By Barry Ritholtz On June 18, 2013 @ 7:15 am In Economy,Financial Press,Markets,Philosophy | Comments Disabled

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 [1], 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.

 


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URL to article: http://www.ritholtz.com/blog/2013/06/whats-your-outlook-on-the-markets-and-the-economy/

URLs in this post:

[1] fiscal response to the crisis out of Germany: http://www.spiegel.de/international/business/buying-itself-out-of-a-recession-countries-ask-how-germany-avoided-mass-unemployment-a-658952.html

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