[dxbydt]

>> A good economist ...can tell you what the economy will do.

I was sipping a venti mocha when I read this and I laughed so hard there's mocha all over my keyboard. There are people here, actual paid economists, who are doubling up in laughter at your assertion.

[grammaton]

"Mainstream economists are masters of the ad hoc explanation for whatever happened yesterday." - John Michael Greer

[smallblacksun]

The First Law of Economists: For every economist, there exists an equal and opposite economist.

The Second Law of Economists: They're both wrong.

[ph0rque]

So the trick is to find a direction orthogonal to all economists, and thus find out what the economy really is going to do? Not a bad idea.

I guess the hardest part about it is not letting an economist read about this direction, and claim it as his own...

[rasur]

Sounds like we need an Economist in the Complex plane..

Hmm, an Imaginary Economist.. Sounds somehow apt?

[silverbax88]

That's funny, because I have some actual paid economists who work for me and they are scarily accurate. But I could throttle back and say 'they know what the economy will LIKELY do'.

I still think you are transposing economists and analysts.

[daeken]

No, an economist knows what the economy should do, not what it will do or is likely to do.

[mattm]

Or can explain what has happened in the past.

[silverbax88]

Sure, I can accept that.

[steve8918]

Just out of curiosity, did any of your economists predict the US recession back in 2007, or the US housing crisis? From what I recall, almost none did.

[silverbax88]

Actually, many did. Economists were telling us that the economy was shaky all through the 00's. Economists told us in 2006 that the market problems from Wall Street would spread into housing.

Again, there is a difference between stock analysts and economists. Economists are looking at numbers, trends and history more like a computer scientist. Economists are even often specialized into various regions of the country.

A stock analyst is going off of timing and trends more than data. If you've ever traded stocks heavily, you learn quickly that traders throw away yesterday...'that money's gone'. Having worked to make companies profitable, it's unsettling to realize that the stock market is full of people who know how stocks work but have no idea how business works.

I think I've posted this before but in one past company we moved millions of dollars of product around before we did our annual inventory just so our numbers would match what Wall Street expected. We actually needed much more on hand than the stock market wanted just to do business, but they wouldn't have any idea about that.

[steve8918]

I've always found that economists for the most part have been extremely unreliable in forecasting things like recessions. (Also stock analysts are useless too) Case in point, an article from 2007, pre-recession:

http://www.nytimes.com/2007/03/04/business/yourmoney/04view....

[silverbax88]

I remember that article. It had two glaring ommissions:

1. Economists were not aware that there would be a major terrorist attack six months later

2. Economists did predict the recession that occurred in March 2001 due to the Bush administration's desire to weaken the dollar. When polled, a few economists were polled if there would be a double dip recession and 95% said no- a fact that changed six months later.

[lionhearted]

I'm enjoying this discussion heavily, particularly your contributions to it which are great. Just a minor (but important) nitpick -

> A stock analyst is going off of timing and trends more than data.

Not necessarily. You can broadly divide analysis into two camps - "technical analysis" [1] which is what you're describing, and "fundamental analysis" [2] which is looking more at intrinsic value, numbers, assets, things like that.

Warren Buffett, for instance, does plenty of stock analysis and he's not a technical trader at all. He repeatedly says he doesn't try to time the market. [3]

The first book I read on trading - Technical Analysis of the Financial Markets [4] - was from a technical analysis perspective, and I lost money trying to implement it.

Then I read about value investing and started trying to apply those principles - only buying fundamentally sound stocks trading at a favorable price earnings ratio, either in fundamentally defensible businesses or with lots of solid assets on their books, and buying with a big margin of safety.

I haven't had a losing trade since then, though in fairness my sample size is small and I don't sell unless the price of a stock I bought gets over what I consider reasonable. I'm currently holding Microsoft and HP which are down, but both I think are way undervalued (Microsoft is extremely stable, has some upside in the way of a strong research division, and could potentially translate a hit like the Kinect into alternate input devices. HP is being treated as toxic despite owning some nice high margin businesses that most people don't think about when they think of HP, as well as a huge patent portfolio and some good assets... yeah, their management sucks lately, but who cares if a company is trading below its liquidation value? anyways, do your own research, check the financials, etc, etc)

Anyways. Not all traders are technical traders. Fundamental analysis is also analysis, and probably easier to implement to be consistently successful. The top book on that is "The Intelligent Investor" [5] by Ben Graham, which Warren Buffets calls the best book on finance ever written (I agree).

[1] http://en.wikipedia.org/wiki/Technical_analysis

[2] http://en.wikipedia.org/wiki/Fundamental_analysis

[3] “If you’re an investor, you’re looking on what the asset is going to do, if you’re a speculator, you’re commonly focusing on what the price of the object is going to do, and that’s not our game.” (1997 Berkshire Hathaway Annual Meeting)

[4] Generally considered one of the best intro books to technical analysis. http://www.amazon.com/gp/product/0735200661/ref=as_li_ss_tl?...

[5] http://www.amazon.com/gp/product/0060555661/ref=as_li_ss_tl?...

[steve8918]

I've come to almost the exact opposite conclusion. I went from fundamental trading to almost completely technical/algorithmic trading.

After the 87 crash, the 2001 crash and the 2008 crash, I'm a firm believer that we will experience crashes every 7-10 years, because the financial markets are fundamentally unstable, and keeping your money in the stock market for long term will only lose you money.

I believe the only way to be in the stock market is to realize that it is a game, that the dominant players all believe it is a game, and you have to know how to play by their rules. In this case, it means that you have to follow the technicals in order to understand the ebbs and flows of the market, and know how to trade, not invest. I believe that given the nature of the markets these days, it's more of a market of probabilities, and short-term momentum rather than fundamentals.

I still think there is room for "investing", but it is high risk to hold things in the market these days.

[lionhearted]

Buy stock of fundamentally solid companies that pay dividends when their stock price is low.

Sell if their stock price gets overinflated, otherwise just hold and collect dividends.

Don't buy stocks that are trading at stupid prices. Don't even buy stocks that are trading at reasonable prices. Only buy stocks that are trading at a steep discount to their reasonably projected future cashflow + asset value + large margin of safety.

...win?

I mean, you kind of can't lose if you do that. Sure, sell if your stocks get overheated. Or just collect dividends forever if it's a great company that's consistently underpriced. Avoid stocks that are priced high relative to earnings/assets, and even avoid reasonably priced stocks. Kind of a no lose proposition that way, no?

[zackattack]

Elliott Wave much?

[silverbax88]

I love your response. This is the kind of thoughtful reply I greatly respect, and yes, when I said 'economists' vs. 'analysts', I really wanted to just make a point between how detailed an economist can be and the difference between such and a stock trader.

Your response is one of the reasons I have to force myself to stay away from Hacker News; I have too much to do but there are some great conversations on here.

[lionhearted]

> Your response is one of the reasons I have to force myself to stay away from Hacker News; I have too much to do but there are some great conversations on here.

This might shock you, but 2-3 years this was the only kind of conversation we ever had on HN with any regularity. It was pretty cool back then.

Anyways, I appreciate the kind words and the discussion as well - drop a line if I can ever lend a hand with anything.

[eru]

> The top book on that is "The Intelligent Investor" [5] by Ben Graham [...]

Isn't the top book on value investing "Security Analysis", and "The Intelligent Investor" is just the popular science alternative?

[Duff]

It didn't take an economist or soothsayer to call these things. A war economy with a massive run-up in property prices that were clearly irrational is a formula for disaster.

Hell, the financial crisis had a early warning alarm. Bear Sterns imploded in the Spring... was the subsequent collapse of Lehman and the crisis really a big surprise?

[trevelyan]

You might want to follow Brad DeLong's blog. Krugman also talked about housing bubbles (http://delong.typepad.com/sdj/2006/01/paul_krugman_on.html) back in 2006. He wrote a column that said so explicitly, arguing that "part of the rise in housing values since 2000 [has been] justified given the fall in interest rates, but at this point the overall market value of housing has lost touch with economic reality. And there's a nasty correction ahead."

My memory of the blogosphere is that people knew housing was overvalued and a lot of people were taking equity out of their homes by remortgaging them at high valuations. But I do not remember discussion of how much fraud there was in originating and repackaging housing loans, and no-one was talking about how these were getting securitized and distributed.

[skylan_q]

When looking for a reason why the economy crashed, I dug through a lot of rubbish until I found Peter Schiff.

http://www.youtube.com/watch?v=Z0YTY5TWtmU

[mg74]

The Economist in 2005: http://www.economist.com/node/4079027

[SkyMarshal]

No, plenty did. From the more famous Nouriel Roubini, Nassim Taleb, and Peter Schiff, to lesser known money managers like Mike Shedlock and Karl Denninger, there were many. Just because the market-cheerleading media hardly covered them doesn't mean no one saw the housing crisis coming.

[steve8918]

I said economists, not money managers. Of the group you mentioned, only Roubini and Taleb are economists. Taleb did not predict a recession. He made money off the financial crash of 2008, which is entirely different.

Of course there will be people who say there is a crash. That's what makes a market. But economists don't predict market crashes, they predict recessions. And very few economists predicted a recession, which is what I said.

[trustfundbaby]

Yes ... go google 'Nouriel Roubini' and 'Charlie Rose Show'

[wnight]

I don't recall economists saying it (I didn't listen) but every trivial housing metric said we'd been overpriced since the 90s. I saw people buy condos they couldn't pay for with rent in twenty-five years, if ever - if all went well. The rule is that 10-12 years gross rent is the highest reasonable purchase price.

Any economist who didn't call the bubble, and painful end of it, wasn't trying.

It will get worse. Our economy is debt all the way down.

[irrumator]

I don't know what else to expect from a thread with an editorialized title taken from Reddit and ZeroHedge of all places.

[cynicalkane]

As economics, as a field, becomes more powerful, the economy becomes more stable. I think this is probably a positive indicator for the value of economics.

This recession is severe, but it has nothing on the recessions of the past. Let's not throw out this knowledge; it was won by the accumulated experience of economic hardship unimaginable to modern Americans.

I have a hard time believing there are any "actual paid economists... doubling up in laughter" in your vicinity. Something about the attitude of your post.

[byrneseyeview]

People entering the workforce forty years ago could reasonably guess when they'd retire and what they'd be doing at the time. I know very few people who think they'll have the same job five years from now. It seems very likely that the argument that the economy is getting more stable is false.

Here's why: underlying predictability probably increases volatily. People love to lever up when they're certain; "Private Equity" as an asset class refers to both VC deals and leveraged buyouts because in both cases, they fine-tune their leverage to get the same (high) volatility. Increased certainty makes bankers more willing to lend, and speculative buyers are always willing to borrow.

In my experience, speculative borrowers and the marginal banker overestimate decreases in volatility. Thus, a more superficially predictable economy will lever up fast enough to more than counteract that (sort of like the theory that airbags increase traffic fatalities because drivers overestimate how safe they are and thus take extra risks).

For economic volatility to actually dampen, you'd need economists to come up with better predictions that sound really stupid, so bankers and speculators would disregard them.

[scarmig]

This is inaccurate, or misleading at best. "It has nothing on the recessions of the past" is only true if you're looking at the pre-WW2 period. Compared to recessions since then, this is the most severe and long-lasting. There has been no recession since the Great Depression where unemployment has stayed as high as it is for so long.

Economists spoke of a Great Moderation that had occurred thanks to their ideological theorizing, but that is just an unfunny punchline to a joke now.

[cynicalkane]

It's plainly obvious that I'm thinking of the entire economic history of the United States.

If you think this recession is bad, look at recessions before modern economic theory came about. That's what I'm trying to get at.

It makes absolutely no sense to throw out sound, proven macroeconomic theory because of a regulatory experiment gone wrong. I'd say it was that macroeconomic knowledge that prevented that mess from being a total disaster. And now people want to throw that economic knowledge out in favor of ridiculous shit like the gold standard, or MORE deregulation, or on the left twisted ineffective versions of laborism, or whatever. Bleh.

[dxbydt]

>As economics, as a field, becomes more powerful, the economy becomes more stable.

umm..Nope. I can give you a subtle, nuanced argument about why that's plain false. However, I will defer to Dr. Derman here - http://blogs.reuters.com/emanuelderman/2011/09/23/the-perils...

[roshanr]

Economists do not necessarily have a great track record with predicting the future state of the economy. From a study by Denrel and Fang: 'Economists who had a better record at calling extreme events had a worse record in general. “The analyst with the largest number as well as the highest proportion of accurate and extreme forecasts,” they wrote, “had, by far, the worst forecasting record.' [1]

Also, this Freakonomics podcast talks about the folly of prediction in general - http://freakonomicsradio.com/hour-long-special-the-folly-of-...

[1] http://www.boston.com/bostonglobe/ideas/articles/2011/01/09/...

[jonnathanson]

"As economics, as a field, becomes more powerful, the economy becomes more stable."

This is magical and, frankly, dangerous thinking.

In fact, this is eerily similar to the hubristic naivete peddled by pundits just before the subprime mortgage crash.

[arethuza]

"As economics, as a field, becomes more powerful, the economy becomes more stable"

So you are asserting that economics as a field causes stability in the economy?

[16s]

Yes, they are like weathermen. The best they can do is make an educated guess.