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The Pitfall Of Rock Star Economists
By EconMatters
The whole idea of going to University and studying Economics, replete with a thorough understanding of the importance of analyzing economic data points seems to be lost on these Rock Star Economists who dominate the financial media landscape these days. The only barometer these so called economists utilize is: “Oh, the stock market has been selling off hard for two weeks we must be in a recession”!
Here is an EconMatters' quick overview on how markets work:
Investors/traders push markets up for as high as they will go, and then when they believe that the upside is pretty limited, then they sell, and shorts come in and piggy back on this selling, and both these factors serve to push markets down (this time as far down as they will go).
This occurs in markets quite regularly and when there is no long term impetus like a roaring economy, or an inflation generated asset program like QE2 in place, assets trade up and down in ranges, cycles if you will, as the business of trading takes place.
This trading volatility has very little to do with how the actual economy is performing, it is trading for the sake of trading. After all, markets could probably get by with only being open once a week, and four to six times a month ( a couple of days for important events) if it wasn`t for the business of trading.
Do you think markets need to be open 6 days a week practically 24 hours a day (with futures and currencies) from a strictly economic analysis standpoint? Well, they don`t, and this is where the whole business that has been built up around the financial markets comes into play.
The financial markets are big business, and economists need to recognize that market generated volatility needs to be largely disconnected from their analysis of the economy. It seems that some of these economists use the financial markets as their only indicator of economic health.
The reason this is problematic for economic analysis is obvious; however, the derivative fallout from this type of practice is equally troublesome. The scenario goes something like this:
Investors take profits, and selling occurs and the markets start going down, short sellers come in and add to the selling. In addition, the financial media reports a lot of negative stories on the economy and markets solely because the markets are going down. This scares more investors to sell, causing markets to go down even further. The cycle continues triggering additional program selling and portfolio stops along the way.
Financial markets continue to go down even further, and some funds are forced to liquidate positions they are perfectly happy with because of margin calls or portfolio losses in other areas. This self-fulfilling cycle of selling causes markets to go down even further, (this is why you often get markets to go directionally much higher or lower than an investor can ever imagine). All this Trading activity can and does occur on a regular basis and has absolutely nothing to do with the economy.
So if economists are looking at the stock market as a key indicator, and markets can fall a whole bunch with the economy being in the same exact condition when they were 25% higher, and economists were talking about ‘Green Shoots’! Then these economists are not only going to be mistaken in their analysis, but when they look at the falling markets, and publicly state that the economy is in a recession, the financial media love to interview them as “Credible Analysts” which only serves to further perpetuate the doom and gloom in the markets, causing an even greater distortion of the underlying economic reality.
The short sellers love this entire paradigm, it serves their purpose quite nicely, but it sure doesn`t help businesses who don`t understand the “Game of Financial Markets” to feel confident about the economy, and engage in robust hiring practices.
Businesses need Economists to be actual economists and be as objective as possible so that they can make business decisions based upon sound economic analysis, (it would be helpful if the financial media then Reported these economic facts), as a natural hedge or check and balance against the financial incentives of the strictly market based participants who are merely trading on volatility.
Here is how the scenario always ends:
All the profit taking has occurred, assets have been pushed down as far as they can go where Traders/Investors realize they can make a lot of money by buying right here, this forces the shorts to cover. Markets go on a nice rally, and then the economists all the sudden have a much brighter forecast for how the economy is performing, and where it is likely headed. The financial media chirps in with, “Gee maybe the economy is just growing slowly, instead of the End of the World Recession that we reported on last week!”
These cycles are ridiculous from an analysis standpoint, and this is where the role that economists are supposed to play comes into the picture and is much needed by businesses and even financial markets themselves, to cut through the media hype with an analysis of the underlying fundamentals of the economy, the actual economic data put in the overall proper context relative to other economic data sets, i.e., what is the trend, historical comparisons, important economic weights, etc.
Economists are supposed to be the rational, logical, analytical, objective source for how the economy is actually performing. What does the economic data say? How should businesses interpret the economic data? We realize it is much harder than just looking at the market activity for the past month and concluding that the economy is in a recession.
However, there is no value-added in that type of analysis, I can get that kind of information from a stockbroker or a cab driver for that matter. The academic rigor of economic research is what separates the economist and provides credibility versus the directional biased market pundit pushing a position. These days the differences between the two are becoming harder to discern in the age of Rock Star Economists.
In short, economists need to get back to being actual economists and not market directional cheerleaders; we have enough of those already in financial markets talking their respective books!
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Yea well....from your printed words to Gods ears!
absolutely excellent read,... that actually dares people to think outside the box, or at least box within the rounded corners once outside the realm of pythagorean logic
by the way, this might feed into your thesis of latter-day-economist:
suddenly,... the nobel prize in economic's became self-fulfilling and adopted by the swedish "riksbank" in 1968 - of course it was in honor of celebrating its 300th anniversary, and thus, per usual - three years later we get the nixon shock
coincidence or collaboration,... any whoo, great food for thought
I rated this post a 2.
Just a fluff/rant piece. I expected more from EconMatters.
Hmm. Man is a bad animal: http://www.youtube.com/watch?v=-SQQPratpOY
Here's your economic question in order for you to explain...WTF: I want you to explain in 40,000 words at a minimum "Goldbugs." Proceed....no charts necessary (other than the one that says price only moves in one direction of course.)
Okymoronic
Economists. Phtttt. Dime a dozen blowhards and shills. Wouldn't know an honest dollar if they saw one, but then it seems, niether would 99 percent of the OWS parade. Don't get me wrong, hats off to them but they don't seem to get it.... yet. No, economists don't need to get back to being economists. They are fulfilling that role precisely. They believe in the magic of eternal growth and compounding interest and such wonderful voodoo as, Deficits Don't Matter. Well probably not to them, but their support for that mesmeric falsehood has indoctrinated otherwise intelligent people into believing it. They fully understand the effects on purchacing power that money supply has on the dollar. They witnessed Zimbabwe. They know. Relying on them to lead us to salvation is the hallmark of insanity. Ignore these turds (Bernanke, Geithner etc.).
End the Fed. End fractional reserve banking. Occupy Princeton.
The pitfall is that almost all of the the so called Rock Star economists are beholden to their bankster and political masters and are bought and paid for with lucrative positions and rich speaking fees.
There were no jobs, or grants, or nobel prizes for scientists who said there was no Global Warming. The same holds true in Econ, nobody will pay for unbiased economic analysis because there's money on the line, and even if you could scare up some unbiased analysis, nobody will print it.
There's also group think. These guys hang out with others of their kind and applaud each other for one upping the last crazy fad idea to the point that they actually begin to believe their own bullshit.
there may not have been nobels for global warming skeptics but there certainly was and is some serious loot from the fossil fuel and utility industries, among others.
This is where supposed common sense and typical left/right thinking gets in the way of how the world really works. What you need to understand is that the rules that apply to smaller and medium sized companies don't often apply to the mega corporations. The ultimate goal of the global warming hoax is carbon taxes and other forms of rationing and control over the "little guy". The taxes will end up just feeding the debt based economy in general and will do nothing for the environment. The fossil fuel and utility companies don't care because the cost of the tax will be passed on to you and me as higher prices. In fact, many are active in helping to write the legislation (see Gore's oil background with Occidental Pet). To boot, most of the mega corps will be exempt from having to follow the same rules as everyone else (read about clean coal-fired plants and GE's exemptions etc.).
I agree with your analysis, but how can anyone convince economists to actually be economists again? It has to be a cultural shift in the community of economists, and as we all know cultural shifts/changes are the most difficult to implement.