50 Shades of Economics
Economic predictions are notoriously a waste of time. With the exception of perhaps just a few, (one noted below), economists are no different. But that doesn't stop them, nor anyone in my business for that matter. It's no secret the financial industry wants us think they've got all of our economic concerns sitting directly under their ever expanding umbrellas. In fact, I'm not aware of any large investment firm that lacks the garden variety, swaggering “chief economist”.
“Economics is extremely useful as a form of employment for economists.”
On the other hand, it is in fact quite true that most economists have a strong knowledge of the economy. They have an expertise in understanding the forces that move our markets and why. Unquestionably, this sort of insight is critical on a number of levels.
Unfortunately, however, economists have an embarrassingly hard time forecasting anything. In fact, a case can be made that anticipating any sort of significant trend is akin to fortune telling. Although, who can really blame them, as even the most obvious trend can be derailed by the slightest hiccup.
Nonetheless, every serious investor should strive for a basic understanding of our economic systems. A great place to start is the Federal Reserve's website. It can help us understand what is happening in our financial systems and why. Yet, I submit that is probably where it should end. In many cases, going much beyond the basics has diminishing, and sometimes negative consequences.
Naturally, after the financial drama of 2008, many folks took it upon themselves to learn more about our economy and of course where to invest their money. Reaching for these answers, many have found great appeal in the contrarian viewpoints of "Austrian" style economists and gurus, who claim we're going to get thrown back into the days of Davey Crocket. This particular clutch of "doomsdayers" are the ones claiming they "foresaw" the economic meltdown of 08-09, and have been selling folks on spooky ideas like hyperinflation, a worthless dollar, and of course - us clamoring for 10 thousand dollar ounces of gold.
Now, admittedly, this is not in any way inherently wrong. These types of prognostications can actually seem quite plausible at first glance, but as Carl Sagan used to say, (in that cool voice), "Extraordinary claims require extraordinary evidence."
Unfortunately, there's an abundance of evidence to the contrary. Further, I've met too many hard working, good people who have been financially devastated by these concepts. They've been betting against the dollar, buying huge allocations in gold, and are now being roasted by this 5 year bull market run.
Gold & Inflation Compared to the S&P 500
In a recent article written by Nouriel Roubini, a well-respected economist from NYU’s Stern School of Business, Mr. Roubini illuminates this phenomenon perfectly:
“One result of this global monetary-policy activism has been a rebellion among pseudo-economists and market hacks in recent years. This assortment of “Austrian” economists, radical monetarists, gold bugs, and Bitcoin fanatics has repeatedly warned that such a massive increase in global liquidity would lead to hyperinflation, the US dollar’s collapse, sky-high gold prices, and the eventual demise of fiat currencies at the hands of digital krypto-currency counterparts. None of these dire predictions has been borne out by events.
Inflation is low and falling in almost all advanced economies; indeed, all advanced-economy central banks are failing to achieve their mandate – explicit or implicit – of 2% inflation, and some are struggling to avoid deflation. Moreover, the value of the dollar has been soaring against the yen, euro, and most emerging-market currencies. Gold prices since the fall of 2013 have tumbled from $1,900 per ounce to around $1,200. And Bitcoin was the world’s worst-performing currency in 2014, its value falling by almost 60%.”
To be sure, most of the doomsayers have barely any knowledge of basic economics. But that has not stopped their views from informing the public debate. So it is worth asking why their predictions have been so spectacularly wrong.
The root of their error lies in their confusion of cause and effect. The reason why central banks have increasingly embraced unconventional monetary policies is that the post-2008 recovery has been extremely anemic. Such policies have been needed to counter the deflationary pressures caused by the need for painful deleveraging in the wake of large buildups of public and private debt."
So, while understanding and following economics is one thing, it's quite another to put one's finances into highly obscure, undiversified predictions. These types of major pitfalls are simply not necessary. Be highly cautious, and seek out at least 2 additional expert opinions when you are advised to make any type of off beat investment decision with your wealth. Of course, it just may work out – but make sure you’re willing to accept the alternative. - JML