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Economic Prediction and the Six Syndromes

April 06, 2012 | Comments: 0 | Views: 156

There are many stock market pundits and economists who claim they predicted various economic downturns and upturns. The Stopped Clock Syndrome (SCS) is that a static prediction will always eventually come true. A stopped clock is right twice a day; likewise an economic bear will eventually predict a bear market and an economic bull will eventually predict a bull market. The upshot is never pay any attention to bears or bulls, or more generally never give credence to anyone who has a strong point of view. They will be right sometimes and those are the times they are going to remember and tell others about.

Who do you trust? Trust no one but listen to those who are analytical and data driven. The truth lies in accurate data from the correct data set if it can be discerned. We have added two qualifiers and we have hardly started. If the data is inaccurate or not the right data was collected then the conclusions can be false. Life and death military decisions often go awry due to either or both of these problems. There is a body of stock prediction 'professionals' called technical analysts who use past moves to predict future performance. They predict future performance of a stock based on a variety of patterns in the stock price movement. A few of these indicators can be traced to stock fundamentals but most are whimsy based on flimsy correlations. I call this the Market Astrology Syndrome (MAS) since the useful data can be gleaned from checking the stock and market fundamentals (like the tides can be predicted by the movement of the moon) and the rest is market nonsense that can cost you your shirt, pants and shoes.

Very bright and creative people are continuously called upon to look at economic data and draw conclusions. The validity of those conclusions are usually limited to their particular area of expertise and the validity of the data they have access to. This leads to the Nobel Laureate Syndrome (NLS); an expert on one narrow area often assumes they are infallible not only in that area but in all other areas as well. Also be aware that Nobel Laureates are often scientists who just got lucky and are not necessarily better than the rest of the pack. The loudest are usually the most opinionated and as such should be taken with a grain of SCS salt. You should expect all predictions to come with a set of caveats since very little is unconditional, not even the proverbial death and taxes.

Does success engender failure? Sometimes it does. That would be the Beauty Parlor Syndrome (BPS). In this case the beautician does a beautiful job on first time customers but after the fish is landed does a lesser and lesser job on subsequent visits. This is also sometimes the case with "experts" who have made a name for themselves through hard work but are now coasting on their former success. They may land an important job in government or in a brokerage house as an analyst or they may use their former success to launch a consulting career or start their own firm. What is amazing is how long people like this can coast, sometimes for decades or until retirement. Saying they have BPS is sometimes being kind to these experts since their motivation can be far less than pure.

This brings us to syndrome number five, the Fox in The Hen House Syndrome (FHHS). You might think the SEC has this covered since someone who touts a particular stock must state whether they own it or not and those privy to inside information are not allowed to act upon it. This goes on all the time and the ones who get caught are usually caught because they got too greedy and caught the SEC's attention (actually the SEC computer's attention). There are also many quasi-legal ways to profit that, although on the shady side, are done all the time. A Radio or TV talking head or through newsletters, email or twitter may state that he owns shares in xyz corporation which is now 18 and he believes is going to 30. Perhaps he bought it at 20 and wants to dump it. His pronouncement causes the stock to go to 22 at which point he sells. More likely he has a pile of xyz options with a strike price of 20 that he bought for $3.50 and ends up selling at $6.00 (when xyz stock reaches 22) for a 71% profit. This "pump and dump" scheme is often done with thinly traded stocks but if the person has a large enough audience it is done with blue chips as well. If the person's actual trading is off-shore then they may be beyond the reach of the SEC even if SEC rules are violated. There are at least a thousand schemes like this to profit by duping others and unfortunately most are legal, especially if options are used since the tracking of options is not as automated as stock tracking is. This finally has reached national attention since banks and investment houses were duping each other with CDOs until it all imploded causing a national and international crisis while making many insider traders very very rich.

Then there are experts who generally are well prepared with good answers but are asked questions that are outside of their preparation. This introduces syndrome number six the Homework Not Done Syndrome (HNDS). The economic landscape can change very quickly from day to day and sometimes hour to hour. One can barely track one small corner of the financial universe let alone track multiple areas simultaneously. Inevitably, interviewers ask them to make predictions outside their comfort zone where they are not up to date and many will go out on a limb to satisfy the interviewer. The viewer or listener is often not aware that this expert is not speaking to the interviewer like he would speak to a client using well researched data.

There you have SCS, MAS, NLS, BPS, FHHS and HNDS which leads to; trust no one, check everything, then proceed with great caution. This goes for any investment including stock, commodities, property, collectibles and even buying businesses or franchises. You have to become an expert in your own investments. Always remember that the market drivers include three human emotional factors Fear, Uncertainty and Greed (FUG). When fear and uncertainty are rampant that is usually the time to buy and when greed is rampant that is often a sell signal. It is human to think that a ride up will never end and a ride down will end at zero. Clearly, the ride down can end in zero (Lehman Brothers) sometimes and the ride up can last a long time for some stocks (Apple) so you always have to check fundamentals as well.


Source: EzineArticles
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