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Betting on Biggs and other Economic Predictions

Economics / US Economy Jun 02, 2008 - 10:51 AM GMT

By: Paul_Petillo

Economics

Some folks would like to call these days an inflection point. But that would be a prediction. The markets are going up, down and sideways in an unpredictable way and yet we are still trying to divine some semblance of normal where normal may not exist.

Douglas Noël Adams, the late author of the classic Hitchhiker's Guide to the Galaxy suggested that, "Human beings, who are almost unique in having the ability to learn from the experience of others, are also remarkable for their apparent disinclination to do so." But in days like these, where experience seems to be as passé as our dominance on the global economy, who do you listen to?


Alan Greenspan has made a few predictions of his own, carrying his post-retirement mantle as economic sage to new levels since his departure as the top US banker. His belief that “the likelihood of a U.S. recession is still more than 50 percent” was backed up by the former Federal Reserve's chairman suggestion that housing prices still have some further declines yet to go.

That may be but that, as far as predictions go, a relatively easy call. What has happened in housing has never happened before. The new gold standard for your home's resale value is now the number of foreclosures on any nearby block. If all of the homeowners in your neighborhood have held their ground, then you will be able to command better prices for what you are selling. This is the new comparable and believe it or not, the vast majority of the neighborhoods around the country have weathered this financial crisis just fine.

True, it may have been a wake-up call that was long over due, but the unprecedented decline in consumer spending, something Greenspan reacted to in 2001 by bringing the short-term overnight rate to 1% should have been equally as predictive of where we are right now as anything he has recently said.

Shortly following that prediction last week in the Financial Times, Federal Reserve Bank of Dallas President Richard Fisher expressed his concerns over inflation, predicting a reversal of interest rates if consumers expect prices to fall from their current levels.

This kind of prediction is almost counterintuitive. It is based on the belief that the economy will recover shortly. And when it does, despite a lackluster economic growth forecast, a pullback in consumer spending due in large part to credit pressures and a much smaller pool of business liquidity, according to Fisher's observation, raising rates would be the natural reaction to inflationary pressures. While it is true that the current rates are as low as they could possibly go and the Fed has explored new territory in reaction to this current crisis, any chatter about a reversal of course would add further credence to the belief that the Fed does not know which way to go either. But to turn coat before each of the previous moves has had an opportunity to fully realize itself, seems a bit pre-mature. So is such predictive Fed-speak worthy of note?

No more than Barton Bigg's latest predictions would be, I suppose. Quoting him from Saturday's Wall Street Journal that “psychology is involved here” may very well be the understatement of the year. Believing as all money managers must, if they are to attract the interest of investors, that things will get better before they get worse is justified. Even market bears predict “worse” markets in the hopes that their investment strategy will work better.

Suppose he's right? His predictions are based on what Greenspan predicts will not happen, Biggs contends that we are at a housing bottom but doesn't go on to suggest that the bottom will be long-lived or not. And even though he acquiesces on inflation – it will happen no matter what the Fed does and if oil tops $175, anything you might think about his predictions are now “all bet's are off”.

So whom do you listen to? Greenspan covering his tracks, the Fed covering their tails, or Mr. Biggs covering his losses (his Traxis Partners LLP has see a 29% shift in returns from the previous year and not to the upside), each of whom offer valid predictions from what would otherwise be learned men in the field.

Or do you follow a much more long-term global path, one that doesn't mimic what has already been done? Each of these gentlemen is in wholly new territory using old school techniques to try and draw wisdom from a present they just don't comprehend.

Giacomo Rizzolatti, studying the brain by monitoring Macaque monkeys, found that imitation often occurs without thought, something reflexive and compulsively intimate. He suggested that the activity in this part of the brain was triggered by a mirror neuron. Could this offer us insight into how the average investor truly reacts?

Possibly. But more than likely, let's hope not. Each of us has an investment strategy, a philosophy we follow, if in some cases we might be unwittingly refuse to acknowledge it. Is what you believe any more wrong than these folks are right? Is a long-term diverse strategy any worse than a short-term, news-oriented trading platform?

It is time we stopped doubting ourselves. It is time we began turning off our mirror neuron and invest based on what we know, how we feel and not on some benchmark set by some other money manager/investor/talking head. Common sense has its own predictive qualities.

ven in times like this, diversity still can dominate over a long period of time. Focusing on growth (in the mid-cap/small-cap arena), value (in the large-caps were at least you get a dividend pop), emerging markets (if you believe that everywhere there is the possibility that the next great economy is incubating in some steamy far-off jungle) and international (which is almost half of the S&P 500) will still allow you to brave any rising or sinking tide, take advantage of all good news and bad, and benefit from the wisdom of those who have to deal with the markets, not those who merely try and control it.

By Paul Petillo
Managing Editor
http://bluecollardollar.com

Paul Petillo is the Managing Editor of the http://bluecollardollar.com and the author of several books on personal finance including "Building Wealth in a Paycheck-to-Paycheck World" (McGraw-Hill 2004) and "Investing for the Utterly Confused (McGraw-Hill 2007). He can be reached for comment via: editor@bluecollardollar.com

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