The pitfall of rock star economists
This post is a guest contribution by Dian Chu, market analyst, trader and author of the EconMatters blog.
The whole idea of going to University and studying Economics, replete with a thorough understanding of the importance of analyzing economic data points seems to be lost on these Rock Star Economists who dominate the financial media landscape these days. The only barometer these so called economists utilize is: “Oh, the stock market has been selling off hard for two weeks we must be in a recession”!
Here is an EconMatters’ quick overview on how markets work:
This occurs in markets quite regularly and when there is no long term impetus like a roaring economy, or an inflation generated asset program like QE2 in place, assets trade up and down in ranges, cycles if you will, as the business of trading takes place.
This trading volatility has very little to do with how the actual economy is performing, it is trading for the sake of trading. After all, markets could probably get by with only being open once a week, and four to six times a month ( a couple of days for important events) if it wasn`t for the business of trading.
Do you think markets need to be open 6 days a week practically 24 hours a day (with futures and currencies) from a strictly economic analysis standpoint? Well, they don`t, and this is where the whole business that has been built up around the financial markets comes into play.
The financial markets are big business, and economists need to recognize that market generated volatility needs to be largely disconnected from their analysis of the economy. It seems that some of these economists use the financial markets as their only indicator of economic health.
The reason this is problematic for economic analysis is obvious; however, the derivative fallout from this type of practice is equally troublesome. The scenario goes something like this:
The short sellers love this entire paradigm, it serves their purpose quite nicely, but it sure doesn`t help businesses who don`t understand the “Game of Financial Markets” to feel confident about the economy, and engage in robust hiring practices.
Businesses need Economists to be actual economists and be as objective as possible so that they can make business decisions based upon sound economic analysis, (it would be helpful if the financial media then Reported these economic facts), as a natural hedge or check and balance against the financial incentives of the strictly market based participants who are merely trading on volatility.
Here is how the scenario always ends:
These cycles are ridiculous from an analysis standpoint, and this is where the role that economists are supposed to play comes into the picture and is much needed by businesses and even financial markets themselves, to cut through the media hype with an analysis of the underlying fundamentals of the economy, the actual economic data put in the overall proper context relative to other economic data sets, i.e., what is the trend, historical comparisons, important economic weights, etc.
Economists are supposed to be the rational, logical, analytical, objective source for how the economy is actually performing. What does the economic data say? How should businesses interpret the economic data? We realize it is much harder than just looking at the market activity for the past month and concluding that the economy is in a recession.
However, there is no value-added in that type of analysis, I can get that kind of information from a stockbroker or a cab driver for that matter. The academic rigor of economic research is what separates the economist and provides credibility versus the directional biased market pundit pushing a position. These days the differences between the two are becoming harder to discern in the age of Rock Star Economists.
In short, economists need to get back to being actual economists and not market directional cheerleaders; we have enough of those already in financial markets talking their respective books!
Source: Dian Chu, EconMatters, October 16, 2011.
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