Liesman vs Achuthan and why investors should be terrified of certainty

I have been drifting into the esoteric with the past few posts and my intention was to get back to more concrete topics, beginning today. This plan was well underway until I un-muted CNBC this morning to hear ECRI economist Laksham Achuthan.

CNBC’s decision to turn Squawk Box into Fox News Lite is none of my business. Its their network and if ratings are getting a boost from insisting daily that the financial crisis, despite any serious analytical backing, was caused entirely by Fannie Mae and Barack Obama (See Ritholz’s WaPo column “What Caused the Financial Crisis? The Big Lie Goes Viral” HERE for more on that), I wish them Godspeed.  The end result for me is that I have the sound on only when one of a few guests are on, and one of them is Laksham Achuthan (Richard Bernstein and Kevin Ferry are the two others that come immediately to mind, btw).

Mr. Achuthan has been arguably the most accurate economic forecaster over the past five years and perhaps more importantly, is apparently using new analytical techniques and indicators – his emphasis on short and long-leading economic indicators is an excellent example. As he noted this morning, he was virtually alone among prominent economists in predicting a slowdown for the latter half of 2011, even if his predicted official recession has yet to become evident.

So, to quickly summarize what happened: Achuthan presented his view that despite recent stronger data a US recession was still on tap, followed by Steve Liesman (fairly) asking “What about recent stronger GDP and consumer spending data”, followed by Achuthan saying that it didn’t matter because there is  contagion in the data whereby more indicators were turning negative, followed by Liesman asking (again fairly)  “like what”, and Achuthan responding something like “it doesn’t matter what, it matters how many”.  After this the whole thing degenerated into a high-volume interruption-fest of gibberish familiar to any fans of the formerly-venerable McLaughlin Group on PBS, wherein Liesman continued to badger his guest with “what do investors do today?”.

Importantly, I do not fault Liesman here. It is perfectly understandable that he attempts to focus the discussion down to actionable ideas because that’s what the audience wants. Achuthan, on the other hand, was beset by the bearish dilemma I outlined in “Sell Side Over-Optimism Explained”, in that he credibly believes he knows what will happen next, but he can’t give a date when it will become evident.

This is a case where, contra Howard Lindzon’s post yesterday, the difference between trading and investing is not just a matter of semantics (it’s just a quibble, HL does great work). Liesman was speaking this morning on behalf of traders (and by extension the investment industry) who need direction and somewhere to put their money today. Achuthan was providing advice for investors, who are looking to the right time to invest assets for the longer term, and who he more or less told to stay in cash for the time being.

Good traders can afford to fade Achuthan’s comments confident, rightly or wrongly, that they will find the market turning point in their charts or other indicators.  For the rest of us, without the time or inclination to sit in front of quote screens all day, we would have much preferred Achuthan be given considerably more time to speak without interruption.  Without constant attention to the tape, an upcoming recession implies that there is little point in “picking up nickels in front of the steamroller”, because the steamroller is picking up speed. Achuthan, in other words, is telling investors you something you will not hear from any employee of a brokerage or investment bank (well, maybe SocGen): wait.

Even that isn’t my biggest problem with this morning’s exchange. After all, Achuthan’s run of prescience could be coming to an end. My real issue is with those who will complain, “Why would I listen to that guy? He can’t even tell me which indicator he’s basing his conclusion on”.  These people want THE ANSWER, stated bluntly, with conviction. To these people I respond; there is nothing you should be more afraid of than a market pundit who is certain.

Certainty is a tremendous marketing tool but there is a reason that the “con” in con man is short for confidence. Remember that it would only take one highly-leveraged trade to make someone wealthy enough to never work again. This implies that if the “certain” dude (and its 99% of the time a dude) was really 100% sure, they would be leveraged 200-1 on the trade and, if it were successful, you’d never see them again outside of Saint Tropez-situated photos in celebrity magazines.  In truth they are not sure – it’s a marketing gimmick to attract your investment dollars.

All of this is just one more facet of the behavioral economics issues I’ve mentioned before as detailed wonderfully by the Psy-Fi blog. We are naturally attracted to certainty and we want to believe that someone has the answer because psychologically the random nature of markets is repellent. But in the end it is most often a trap and all investors should remember what a portfolio manager once told me:

“People don’t like to hear it but we are in the probability game, not the certainty game. “

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25 thoughts on “Liesman vs Achuthan and why investors should be terrified of certainty

  1. […] of the day (from a new favorite blog, Interloper):  “[T]here is nothing you should be more afraid of than a market pundit who is […]

  2. Chase says:

    This blog is fantastic. Keep up the great work.

  3. […] especially when it comes to forecasting the economy, is a mistake.  (Interloper, Money […]

  4. […] “People don’t like to hear it but we are in the probability game, not the certainty game.” (Interloper) […]

  5. Achuthan seems pretty certain LOL. He came across a little like a forecaster clinging to a call without backup.

    it may be fair for him to say, look, it’s not one indicator, it’s the fact that a whole bunch started flashing, and they holistically get baked in my mathematical pie.

    But it’s also fair for Liesman to ask which ones are negative.

    Recently the financial and confidence indicators look pretty bad, but the real economy is stumbling along. Maybe It’s a little like correlations going to 1 in a panic, traditional relationships don’t hold that well in extreme situations. Possibly people are overwrought and the economy is telling the true story… or possibly the sentiment-influenced gauges are reacting to deterioration that’s not yet in the data.

    If I were Achuthan I would just lay it out, says these are up, these are down, the model says X, and I’m going with the model because it’s been right before. No need to get defensive.

    • Interloper says:

      Oh yeah, LA was flustered, no question. Totally guessing, but I think he’s measuring second derivative change in the indicators and didn’t think he had time to explain it. You never know what the producer is saying in those earpieces either, so who knows. It’s the pushing, “so what do we do today?” that I find interesting, anyway. Economists HATE that.

  6. […] Story: Liesman vs Achuthan and why investors should be terrified of certainty (Interloper) […]

  7. Tristan Grayson says:

    This article (http://www.fundmymutualfund.com/2011/10/does-market-have-it-wrong-or-does-ecri.html) or the referenced CBS MarketWatch article pretty much answers the “what should we expect in the stock market?” and “what should we do today?” questions based on history. Basically, sell rallies before a 30-40% drop over the next 18 months.

  8. […] What can we learn from yesterday's economics shoutfest on TV?  (Interloper) […]

  9. mark says:

    Nice post. Joe Kernan has really ruined the morning show now with everything being Obama’s fault blah blah. And I felt bad that of a 7 minute interview, the ECRI guy could talk maybe 3 minutes of it.

  10. CB says:

    The world had turned away from the Tao. It is now slowly turning back.

    • Interloper says:

      I love comments like this. The Way, I think, demands more introspection among individual constituents than is currently probable. However, the current misshapen economy could be loosely interpreted as a Taoist bending towards the force of the big demographic bulge which itself is now changing shape. in that interpretation, it is The Way that has changed, and we have yet to adjust to it.

      • CB says:

        Where there is suffering and turmoil, there is a rejection of the Tao.

        All things change, that is the nature of the Tao, and the Tao never changes. The Tao has been abandoned by promising certainty through economic confidence men. People have tried to live against the Tao and bewilderment is their reward.

  11. […] What can we learn from yesterday’s economics shoutfest on TV?  (Interloper) […]

  12. Mario says:

    I just watched the vid you’re talking about here (link here):

    http://www.creditwritedowns.com/2011/11/ecri-the-us-is-still-headed-for-recession.html

    And I am not giving Steve so much slack as you are (and he knows Warren Mosler too no less). Steve’s ramming LA down the throat and being a bully. Not cool man. Of course ECRI isn’t going to give up his indies that he watches!!! That’s his business….do you get to look at a guy’s poker hand without paying him something? Perhaps they are paying him something as he’s on the show fair enough but not enough to get him to spill his beans. He’s there to talk and I really respect ECRI and I agree with him more or less. The biggest trick they all have foisted on us is to equate “the markets” (the S&P) with “the economy”…far from it my friends!

    It’s really a shame that these hyenas of reporters are out there on LA. He seems like a good guy to me and I agree completely about the certainty contagion!

    The Tao is….the Tao. ;)

    • Mario says:

      let’s also not forget the real dynamic of buy low, sell high (and sell high, buy low). the very fact that there is NOTHING TO “GO TO” is actually case-in-point to beware of a down-swing. Why they even put guys like LA on the show only to shoot them down is almost kind of perturbing…or incredibly sinister and corrupt…depending on how you spin it. Many times there are “pops” that attempt to fake out people on turns in the market….at that point, like he said, you need to look for divergences being more pronounced to get some more reliable confirmation of a roll-over. I see it all the time in my trading…LA is just looking at that same process on a much higher time-frame with different indicators. Pretty neat stuff indeed.

  13. […] Again (Patrick Chovanec) • Liesman vs Achuthan: Why investors should be terrified of certainty (Interloper) • Small Banks on Occupy Wall Street’s “Move Your Money Day” (Fast Company) • […]

  14. ken says:

    Ken, I never watch CNBC, but like hearing what LA has to say on these updates. I’m a trader, but am getting more cautious as the market sneaks higher.

  15. Kiki says:

    Achuthan has been right over and over again. He could be wrong now about recession call but I expect he’s right. He doesn’t predict market behavior; he measures economic cycles. That’s all ECRI does. Measuring and pouring over the data is all they do.
    Liesman was rude. RossSorkin was rude.

  16. XRayD says:

    Keep in mind that LA charges a pretty penny for his information to customers who get it a week before he goes public with it.

    The LA/SL exchange was a follow up on LA’s previous appearance.

    Of course, LA is right logically. Proof of the economy having entered a recession is by definition historic. But LA is a fortune teller for which he wants his palms crossed with silver, first. No one expects him to be right a 100% of the time, but money managers are willing to pay for any edge, and it pays to shop at a quality store, instead of WMT or what other CNBC cheap and free pundits peddle!

    Of course, the Raj Rajaratnam approach also works for some!

    Even my palm reader demands $5 and it does not matter if she is right or wrong, she soothes my nerves!

  17. […] (Our emphasis.) CNBC is desperately trying to get a short term market call in the video below. Go here for a good discussion of why they are missing his point, but I will agree with him abut timing. The broader market and […]

  18. junkndump says:

    Jon Markman article mentioned that LA’s wife was expecting a baby a couple of weeks ago. Maybe that made him a bit less patient than usual with SL insisting that there must be an indicator that spells recession, even after LA told him it was the Weekly Leading Index. SL’s main challenge to LA was Goldman and JP Morgan, as if they are great recession forecasters. Then ARZ says the market is up so there’s no recession, but doesn’t want to hear LA point out that is the same thing that happened in 2008 and 2001.

  19. […] View Article: Why Investors should be Terrified of Certainty […]

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