From The FT:
Sir,
What is the similarity between the current financial crisis and a volcano? The answer is the shape of the graph of activity levels leading up to the main event. It shows a long period of deceptive calm followed by a dramatic eruption, up or down, depending on which event is being plotted.
The main interest in both cases is to predict when the big event will happen, and it is clear that with regard to the economy, conventional statistical and economic analyses failed us almost completely. Although many analysts predicted a crisis, nobody correctly predicted the timing*.
As with the volcano, where the relevant metric is the pressure building up out of sight underground, the issue with the economic crisis must have been pressures building up, out of sight, elsewhere in the economy. With the benefit of hindsight, we can now see that we were looking at the wrong variables, as these "underground" metrics were literally invisible**.
A big prize surely awaits the identifier of these pressures and a definitive explanation of why the timing was as it turned out to be. I am surprised that it seems few attempts have been made to probe further than simply blaming irresponsible bankers and sub-prime loans, as these went on for years and do not explain the timing of the crisis.
More serious work is urgently needed by economists and statisticians if they are to remain trusted advisers. Please get to it.
Peter Vos, Littlehampton, West Sussex, UK.
* Er ... Fred Harrison predicted the 1989 and 2007 crashes/recessions many years in advance, see his Moneyweek article from August 2005, for example. As did many other Land Value Taxers, for that matter. Why do you think I sold all my investment properties and my own home in the years leading to December 2007?
** "these 'underground' metrics were literally invisible"? Wot? Rising house and commercial property prices are very well documented and have been constantly in the headlines for the past eight years or so. It's not "underground" that we need to look, it's under our noses. Or under our feet, depending on your point of view.
Vile Hatred
1 hour ago
10 comments:
Or to put it the other way around, shorting stock would not work if we knew exactly when an event would occur.
Stock shorters, speculators (an honourable profession in my view), indicate to all market participants the view of a stock or situation.
Why oh why do people persist in thinking the future can be predicted. I bet he laughs at the punters that think Gypsies are able to predict someones future from crystal ball gazing.
L, "why do people persist in thinking the future can be predicted..?" Do you think Fred was 'right' on the last two occasions or just 'lucky'?
Anyway, of course speculators can't see into the future - but they CAN see the present much more clearly.
a) Fred was wrong; he called it a year later than it actually happened (with the bubble bursting in 09 and the depression kicking off in 10)
b) of course he was lucky; in a world with tens of thousands of pundits, you're going to get one whose blind guesses happen to be right
c) we all knew there'd be an economic slowdown fuelled by the unwinding over-high property prices - that's not the point at all. Based on the over-valuation data, that could've taken the form of long-term property price stagnation, of high inflation with flat asset prices, or of a catastrophic collapse. There was no data available in advance (and Dec 2007 isn't "in advance" here, by then it was clear that there was some serious bubble-bursting going on) to say *how* the boom was going to be corrected.
JB, Fred wrote in 1983 that house prices would peak in about 1989, with recession to follow. Fred said that the top of the housing market would be in late 2007, with recession to follow, back in 1997.
Yes of course 'luck' had something to do with it. But they are far from 'blind guesses'.
I sort-of predicted the current blow up, although not far in advance. I had no interest in global economics until August 2007. Then it happened and within ONE MONTH of SELF STUDY I was able to move everything into cash and predict pretty much every major trend of the market crisis since then. I've read plenty of people (like Mish, Financial Ninja, Tanta) who were even more accurate and much earlier.
Like Tanta and Cassandra said, everyone who got it wrong is trotting out the "hoocoodanode" and "perfect storm" excuses to cover up their own incompetence.
I knew something was amiss years ago, with regards to house prices. Admittedly I had been saying they were too high for about 5 years so like a stopped clock I'd be right eventually.
I also sold all my shares in April 2007.
Everytime a politician does the 'who saw it coming?' riff I throw stuff at the radio or TV. Loads of people predicted it, its just that they didn't want to listen to them. When the party's in full swing, no one wants to leave.
Fred was right in his predictions - if his timing was spot on that was probably luck. Although I concede that there one or two very insightful people who do get their timing mostly right, e.g. Warren Buffett, the vast majority do not.
We - I - have been predicting a massive house price corretion since about 2001/02, but I had no idea when it would be or what would trigger it.
I will make another prediction that house prices will decline between now and the next election, after which there will a shorter steeper decline as the next government is forced to implement sound money policies and unemployment leaps, most probably from state worker lay-offs.
Getting it right in August 2007 is also not impressive - that's the point when the paralysis of the banking system becomes a serious possibility.
"Admittedly I had been saying they were too high for about 5 years so like a stopped clock I'd be right eventually" is the point - if, whenever anything happens, you say 'it's a bubble and we're all doomed', then you'll end up right at some point, and you probably won't go bust, but you're unlikely to make much money in the meantime.
I'm as guilty of that as anyone - I didn't buy a flat in Manchester in 2001ish because I couldn't imagine prices rising enough before I'd want to sell it to make the transaction worthwhile... whereas actually, I'd've made about gbp50,000 over three years. However, I also didn't buy a flat in London at the beginning of 2007 for 'obviously overvalued' reasons; I'd've probably lost about the same sum in two years if I had. Net property win: 0. Net property win if I'd ignored the fact that it was obviously a bubble, bought in 2001, stayed on the ladder, and sold up in late 2007 once the crash was clearly underway: gbp50,000ish.
(and while Fred may've been right in 1997, he was wrong in 2005 per the linked piece).
"Getting it right in August 2007 is also not impressive"
Sure. But bear in mind about 95% of analysts in the City and on TV got it wrong the whole way AFTER August 2007.
I'm not expecting a Nobel Prize. Just pointing out it wasn't difficult and this was BEFORE the market peak (i.e. stocks in Oct 07 and London housing about a month later).
Can someone comment on the fact (as I see it) that there is no reason why one cannot have falling output and incomes combined with high price inflation. If serious military hostilities led to a heavy fall in oil production and oil prices went through the roof, this would not stimulate the economy. It would simply make everything expensive. Such an outcome might be possible even without war.
Second, when (many years ago) I read about the history of the Great Depression, students were advised not to make the mistake that Keynes was advocating massive state interventions from a base like that which prevailed by the 1970s. The size of total state spending was tiny when the main elements of his theory were devised. Also, he assumed a world of stable currency equivalents and control over movement of capital and labour. He did not suggest the kind of intervention Brown is mindlessly undertaking with state control of way over 50% of the economy already, free capital flows (through the natiomalised banks as much as anywhere) and global labour movements making a nonsense of seeking to achieve change at the margins.
The famous idea of government burying money and paying people to dig it up would, today, go like this. State buries money - which becomes worth less and less as the exchgange rate falls. Nobody is interested in taking the job of digging it up because the difference between the pay and other forms of state subvention are not great enough to make it worthwhile -- until some people from Poland arrive. They dig up the money, exchange it, go home on a cheap flight (airline owned by German company) and spend it in Poland on German goods.
Or am I simply making a mistake about absolutely everything?
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