Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Pitfall Of Rock Star Economists

Economics / Economic Theory Oct 16, 2011 - 07:14 AM GMT

By: EconMatters

Economics

Best Financial Markets Analysis ArticleThe 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:

Investors/traders push markets up for as high as they will go, and then when they believe that the upside is pretty limited, then they sell, and shorts come in and piggy back on this selling, and both these factors serve to push markets down (this time as far down as they will go).

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:

Investors take profits, and selling occurs and the markets start going down, short sellers come in and add to the selling. In addition, the financial media reports a lot of negative stories on the economy and markets solely because the markets are going down. This scares more investors to sell, causing markets to go down even further.  The cycle continues triggering additional program selling and portfolio stops along the way. 

Financial markets continue to go down even further, and some funds are forced to liquidate positions they are perfectly happy with because of margin calls or portfolio losses in other areas. This self-fulfilling cycle of selling causes markets to go down even further, (this is why you often get markets to go directionally much higher or lower than an investor can ever imagine). All this Trading activity can and does occur on a regular basis and has absolutely nothing to do with the economy.

So if economists are looking at the stock market as a key indicator, and markets can fall a whole bunch with the economy being in the same exact condition when they were 25% higher, and economists were talking about ‘Green Shoots’! Then these economists are not only going to be mistaken in their analysis, but when they look at the falling markets, and publicly state that the economy is in a recession, the financial media love to interview them as “Credible Analysts” which only serves to further perpetuate the doom and gloom in the markets, causing an even greater distortion of the underlying economic reality.

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:

All the profit taking has occurred, assets have been pushed down as far as they can go where Traders/Investors realize they can make a lot of money by buying right here, this forces the shorts to cover.  Markets go on a nice rally, and then the economists all the sudden have a much brighter forecast for how the economy is performing, and where it is likely headed. The financial media chirps in with, “Gee maybe the economy is just growing slowly, instead of the End of the World Recession that we reported on last week!”
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!

By EconMatters

http://www.econmatters.com/

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2011 Copyright EconMatters - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in