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. “