Good reads from around the Web.
You can’t turn on the TV or read a business website without stumbling across an economist these days. The financial crisis took these nerds-turned-superstars off the sidelines and onto the front pages.
Why did economists become our go-to pundits? Because we demanded explanations for what happened in the meltdown, and economists fell over themselves to give them.
Sadly, as my post of the week from The Atlantic explains, while economists might be pretty good historians, they’re rubbish at proposing useful actions or predicting the future:
Imagine you are the Royal Physician in England some time during the 14th century. The prince is sick, and you’ve been summoned to help. You call in two experts for advice. The first says: “Use leeches to suck out the evil humors.” The second says “No, you must bleed him to get the evil humors out.” They start to argue, insulting each other in nasty epistles. “Leech guy is secretly working for the French!” alleges Bleeding Guy. “Bleeding Guy just wants the prince to die because the prince wanted higher taxes on the nobles!” Leech Guy fires back.
What’s the right move? Well, in an ideal world, you would go and get 999 patients who have illnesses similar to the prince’s and give them all a variety of household substances, such as bread mold. Then you would take careful note of who died and use statistical analysis to figure out which household substances cured disease. Thus, you would discover penicillin and invent modern medicine.
Sadly, this is not what you do, because a) if you proposed it, you would be led off to the dungeons and beheaded b) it’s the 14th century and you have no concept of the scientific method and c) you don’t really have the right tools for that experiment, anyway. Instead, it’s bleeding or leeches. So you take your best guess and you pray you’re right.
The economic situation we find ourselves in today is a little bit like the example above.
I’m skeptical when I hear an economist explain what’s going to happen in the economy. After many years of reading their opinions, not one has struck me as generally right.
Some, such as the perma-gloomy Nouriel Roubini, seem to be like the sacrificial virgins of our forebears. When the market falls they are given airtime to appease the Dark Lords of Doom, but once the Apocalypse is postponed, they’re returned to the dungeons.
Lots of investors say they don’t take economists seriously, but my experience says otherwise. From 2009 to 2012 I was regularly emailed economic predictions – invariably pessimistic – from investors I know. Comments left on this blog were similar.
Like porn stars, somebody must be using their services and paying for them, whatever they say in public, or else the economist industry wouldn’t be so big!
I rarely include economic prophesies in Weekend Reading. But I do think economists can be helpful to get a view (not *the* answer, and not a prediction) on what’s already happening in the economy, or in a specific sector.
Economists are most useful at explaining recent changes on the bottom-up level – the pent up demand for UK housing, say, or the way that employment is rising despite the weak economy.
Just don’t let them get their crystal balls out.
Or when they do, picture Gypsy Rose!
From the blogs
Making good use of the things that we find…
Passive investing
- The dangers of back-tested ‘system’ ETFs – Clear Eyes Investing & RB
- Is dollar (or pound) cost averaging better? – Canadian Couch Potato
- More unconventional failure – Rick Ferri
- Bloomberg Black: Luxury DIY investing? [US] – I Love Wall Street
Active investing
- Dividend investing: Really a value strategy? – DIY Income Investor
- Investing is as much about risk as returns – UK Value Investor
- High dividend shares still look expensive – Learn Bonds
- The popularity of low vol ETFs = market timing – Abnormal Returns
Other articles
- What’s going on with this crazy stock market? – Investing Caffeine
- Get rich with the Cha-CHING! instinct – Mr Money Mustache
- Investing is different from saving – Simple Living in Suffolk
- Dave Ramsey’s dangerous 8% withdrawal rate – Wade Pfau
- Why you need a growing income to beat inflation – Value Perspective
Product of the week: Back in the good old days, I engaged in the great wheeze known as “stoozing”. You borrowed money on a 0% credit card, and saved it for the interest. Free money! Balance transfer fees made stoozing uneconomical, but This Is Money says Tesco has just launched a 0% card with no fees. Come, Watson, come! The game’s afoot! Not so fast. Savings rates are very low, after-tax1 and you don’t want to use ISAs because you’ll probably need to withdraw the money to repay the stoozed debt. Might be worth the hassle if you’ve got an offset mortgage, though.
Mainstream media money
Note: Some links are to Google search results – these enable you to click through to read the piece without you being a paid subscriber of the site.
Passive investing
- Avoid the trap of buying high – NY Times
- How chasing yield affects expected returns – Swedroe/CBS
- Stop feeding the fee machine – Institutional Investor
Active investing
- Inside the JP Morgan Emerging Markets Income Trust – iii
- Joel Greenblatt’s Magic Formula that beat the market – This Is Money
- How to invest in wine [Search result] – FT
- Gold market timers do worse – MarketWatch
Other stuff worth reading
- Rent out your spare stuff for cash – The Guardian
- It’s dangerous to expect 12% returns a year… – Motley Fool (US)
- … not least because it provokes online brawls – Forbes
- How QE made the rich richer and annoyed hedge funds – The Economist
- Why you won’t finish this article – Slate
Deal of the week: Amazon has knocked £15 off its full colour Kindle Fire
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- Though your debt would be eroded by inflation, which makes up for some of that… [↩]
Today’s SMBC is particularly relevant:
http://www.smbc-comics.com/index.php?db=comics&id=3003#comic
@Greg — Heh, cheers for that!
> Though your debt would be eroded by inflation, which makes up for some of that…
Only if you took out the debt while you didn’t have the cash to pay it up front, purchased a need rather than advanced acquisition of a want but saved the money up out of income to pay it off by the time the term was up.
It’s not a useful way to achieve a return on cash now. Or am I missing something – your offset mortgage-holder is the only use case I can think of here. Unless of course you’re holding God knows how much revolving debt on high-charging credit cards, but I’d like to think that Monevator readers don’t do that…
I have fond memories of stoozing – MBNA cash-advanced my first mortgage deposit interest-free so I could reduce the parasitic cost of the Mortgage Interest Guarantee.
Thanks to the link too!
There are so many issues with both the “dismal science” and acting on the prognostications of its practitioners, the Atlantic article barely scratches the surface.
Evaluating the prognostications of economists, by both governments and investors is terribly prone to confirmation bias. Pushing the medical analogy further, a hypochondriac visiting two physicians, one of whom diagnoses a serious illness and the second no problem is likely to favour the first opinion. Conversely, an inveterate optimist visiting the same two physicians and hearing the same opinions is likely to favour the second.
Reaction to economists’ opinions is likely to be influenced not only by confirmation bias but also by the political outlook of the economist in question and that of the investor or government responding to the view opined.
Then there is the temptation to say that economist X called the credit crunch correctly and therefore her opinion should be given great credence. To which my response is “past performance” is no guide to future performance”.
And yes, perma-bears can resemble stopped clocks which show the correct time twice a day!
“Prediction is very difficult, especially if it’s about the future.” –Nils Bohr.
I’ll finish with a question relevant to governments and investors alike. What would the impact be on the gobal economy if China’s growth dropped to 4% or lower within 3 years and her imports of commodities began to decline?
The only economist ever worth your precious time was the late, great J. K. Galbraith; and that’s mostly because of his witty put-downs of the economist profession!