expressed in this column are solely those of the author and do not reflect the
views of SVB Financial Group, or Silicon Valley Bank, or any of its
Who? Who? Who? Who?
Who are you?
Who? Who? Who? Who?
Who? Who? Who? Who?
- The Who
Often when I'm asked to
speak at events, I am introduced as an economist. When this occurs I do my best
to correct the perception. In my view, to be considered an economist is a slur.
Let me explain.
It's true we both look into the economy and determine
what we think to be the most likely course ahead. But that's really where the
Economists use models that have anywhere from 24 to
224 inputs with all kinds of Greek symbols that encode their life's work,
including all personal biases and potentially quirky views embedded in their
DNA. These formulae are not only the foundation of their analysis, but provide
the justification for more expensive computers and expansive slide decks to
describe the complexity to their outlooks.
Economists then use their
final points of view for very little purpose other than to share them.
(Certainly, no Wall Street firm actually invests in accordance with their ivory
tower point of view — that I can all but guarantee!)
Sitting in the
ivory tower, the only measure of success is to publish your own writings, have a
publisher agree to a book deal of some sorts, or appear on CNBC on a regular
basis. Success has little to do with being right — it's more about being
On the other hand, we portfolio managers must actually enact
some sort of decision based on our outlook. Given there are real-world
implications that arise as a result of my team's analysis, it is much more
important that we be correct — and less important that we grab headlines.
Perhaps that's why economists aren't very good at this and why portfolio
managers have to be.
A recent summary of Bloomberg surveys I came across
supports this point of view. In particular, since December 2002, economists
surveyed by Bloomberg have forecast "rising rates" in 93 of the 97 survey
months. Furthermore, in the four outliers, interest rates rose significantly
during the survey period. This means that it's possible the economists were
trying to forecast higher rates, but by the time the survey was released
they had already risen and so their rate targets were actually lower than the
rates at publishing time.
Choosing "heads" 100 percent of the time would
lead you to be correct for about 50 percent of coin flips. Incredibly, during
these survey months, the economists were right 56 percent of the time. Well,
I must say I wasn't really surprised at this outcome.
Since September 1981 when the 10-year Treasury peaked at 15.84 percent, we've
experienced lower and lower rates. Given this long-term downtrend in rates and
an embedded human nature effect that drives toward a "reversion to the mean"
expectation, it seems economists are likely allowing their personal biases to
overcome any formulaic strength in their models. (If it exists in the first
place at all, that is.)
More recently, since September 2008 this survey
has only pointed to lower rates in two of the 29 months the survey has occurred.
In that time, the 10-year Treasury fell 13 of the 29 months from 3.8 percent to
3.2 percent, while reaching a low of 2.1 percent in December 2008.
a hedge fund run from the survey, investors would have been wiped out long ago.
But economists retain the microphone and that's the way we investment managers
As long as there are enough economists spreading misinformation
and misguided outlooks throughout the market, there will be money to be made by
true investors performing worthy analysis.
Fourth quarter of 2010 grew at a faster pace than the
second revision. The pace was revised to 3.1 percent from 2.8 percent. The
increase was propelled by a surge in consumer spending from a healthy holiday
season. This was the strongest quarter since fourth quarter of 2006.
Orders for durable goods unexpectedly fell in February signaling that
the U.S. economic rebound may be stalling. Purchases of goods meant to last over
three years decreased 0.9 percent after a gain of 3.6 percent that was revised
for January. The data on orders stands in contrast to other reports this month
that showed production picked up in February and factory purchasing managers
were more optimistic.
Home prices in the U.S. declined 3.9 percent from
a year earlier, signaling that the housing market in the U.S. is still a long
way from recovery. Arizona and Nevada led the drop with an 8.6 percent in the
region, Florida was close behind at 5.6 percent. The growing amount of
foreclosures has depressed values and increased inventories. The number of
previously owned homes on the market rose 3.5 percent in February, the biggest
gain in almost a year.
The views expressed in this column are solely those of
the author and do not reflect the views of SVB Financial Group, or SVB Asset
Management, or any of its affiliates. This material, including without
limitation the statistical information herein, is provided for informational
purposes only. The material is based in part upon information from third-party
sources that we believe to be reliable, but which has not been independently
verified by us and, as such, we do not represent that the information is
accurate or complete. The information should not be viewed as tax, investment,
legal or other advice nor is it to be relied on in making an investment or other
decisions. You should obtain relevant and specific professional advice before
making any investment decision. Nothing relating to the material should be
construed as a solicitation or offer, or recommendation, to acquire or dispose
of any investment or to engage in any other transaction.
Management, a registered investment advisor, is a non-bank affiliate of Silicon
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