Saturday, June 25, 2011

Are These Guys Economists Or Simply Trend Following Robots?

Mokoto Rich at NYT writes today:
A drumbeat of disappointing data about consumer behavior, factory sales and weak hiring in recent weeks has prompted economists to ratchet down their 2011 economic forecasts to as little as half what they expected at the beginning of the year...Economists are waiting to see whether the disappointing Labor Department report of hiring in May — which showed that employers added just 54,000 jobs, hardly enough to keep up with normal population growth, much less dent the unemployment rate — was an anomaly or the sign of a significant stall.
This is a very accurate depiction of how most "economists" operate. They look at current data and extrapolate out the current trend. They have no theory about the economy that would actually result in their foreseeing a change in trend before it occurs. But the Austrian school of economics offers a theory behind changes in the economy. If you understand the theory, it is much easier to understand changes that might occur. You might for example, have spotted the recent financial crisis in advance (See here, here, here, here, here, here, here and here.)

And as for the current sluggishness in the economy, in the EPJ Daily Alert, I wrote in February of this year, long before any trend following robots detected any new downward trend in the economy:
The Fed is pumping money, but most of it is ending up as excess reserves. Here's the latest breakdown. Between Feb 9 and Fed 23 required reserves climbed by $1.5 billion. This is roughly a growth rate of 0.50%, Excess reserves (money not in the system) climbed during the same period by $120 billion.

On the money supply front, the Fed marked down 3-month M2 January growth on an annualized basis to 4.1%.

There's no way the stock market or the economy holds up under these conditions. The stock market and economy were blown up by 7% annualized money growth, we are almost at half that...
Fed Chairman Ben Bernanke runs an extremely erratic money supply policy. It is much more erratic than the policies under Paul Volcker or Alan Greenspan. Therefore, it is a very difficult period to anticipate short-term trends, but the robot extrapolators are going to get really whipsawed if they simply track the trend of recent months. Indeed, there are some indications that money supply is accelerating again, if this acceleration continues, the extrapolators are going to be way off again, as the economy and stock market will pick up strength again.The extrapolators won't pick up such a new trend until it actually occurs and then is trending for at least a couple of months. For those trying to trade the markets that's months too late.

No comments:

Post a Comment