Wednesday, January 18, 2006
Inverted Yield Curves & the end of the World :City Economists, Profits of Doom?
The Oracle ( no not Larry Ellison's) at Delphi ( no not the auto parts maker) ,The Cumean Sibyl, Tiresias the blind prophet. These are all examples of people from the ancient world with the power to tell us the future. Gifted by one God or another with the power of prophesy, often cryptic, reading the future through the entrails of sacrificed animals. The enlightenment came and went and of course we are all far more sophisticated now.These were just universal myths.Who believes that stuff.Today we have have predictive texts ( right most of the time) consult your mobile phone, weather forecasters - there are whole channels devoted to this on cable, switch on your TV ( mostly right) and of course the professional city economist. Every firm has at least one, most firms a few. Have you consulted yours?
In the age of the economic man the predictions of economists matter more than you would think,their pronouncements will eventually affect your take home pay(through tax policy), mortgage and debt servicing,( interest rates and inflation) , holidays & shopping( currency movements/ trade deficits/surpluses). They are powerful people but like the soothsayers of the ancient world very few are reliable and worse we give them that position of power over us. We think they know something we don't, we ask for guidance. This is a form of wish fulfillment by individuals and capital markets. No one can know the future, ever.Economics, the dull science for dull people is decidedly dangerous in the wrong hands. Most economists seem to be mild mannered geeks but they can cause havoc in capital markets. What's the one in your company like? Right prediction...oh but just the wrong time frame. Oh dear that's the same as being wrong isn't it? Dollar bears, interest rates hawks. Whatever.
What set me thinking about all this? Around the end of last December there was a yield curve event. The US 10 year treasury was paying less than the 2 year note.This yield curve inversion according to most economists presages a recession.Most economists will tell you that this is a sure sign of doom. Hmmmmmm.Taken in isolation this fact means nothing. It's up there with stock market cycles and the length of skirt hem lines. Yet because it comes from the mouth of well heeled professional economists we tend to believe this stuff. They must know right? No one knows the future. Like most of the finance industry these people are generally ill informed about the real world, maybe not about macro-events but ask them the price of a litre of milk , or how much a loaf bread costs, they have no idea. By all accounts The Pythias were deemed to be very worldly and their knowledge covered history, mathematics, philosophy, religion, politics. Sadly our modern economists know only about one thing, ..err economics.They are theorists and as such their spurious but some times well intentioned advice can cause us a great of distress and and lose us money. That's not to say they are all bad, most professional ones seem to be though. So don't believe the hype, if soothsayers can bankrupt Croesus they can certainly take you down.
Beware geeks bearing gifts of economic forecasts.
RB
In the age of the economic man the predictions of economists matter more than you would think,their pronouncements will eventually affect your take home pay(through tax policy), mortgage and debt servicing,( interest rates and inflation) , holidays & shopping( currency movements/ trade deficits/surpluses). They are powerful people but like the soothsayers of the ancient world very few are reliable and worse we give them that position of power over us. We think they know something we don't, we ask for guidance. This is a form of wish fulfillment by individuals and capital markets. No one can know the future, ever.Economics, the dull science for dull people is decidedly dangerous in the wrong hands. Most economists seem to be mild mannered geeks but they can cause havoc in capital markets. What's the one in your company like? Right prediction...oh but just the wrong time frame. Oh dear that's the same as being wrong isn't it? Dollar bears, interest rates hawks. Whatever.
What set me thinking about all this? Around the end of last December there was a yield curve event. The US 10 year treasury was paying less than the 2 year note.This yield curve inversion according to most economists presages a recession.Most economists will tell you that this is a sure sign of doom. Hmmmmmm.Taken in isolation this fact means nothing. It's up there with stock market cycles and the length of skirt hem lines. Yet because it comes from the mouth of well heeled professional economists we tend to believe this stuff. They must know right? No one knows the future. Like most of the finance industry these people are generally ill informed about the real world, maybe not about macro-events but ask them the price of a litre of milk , or how much a loaf bread costs, they have no idea. By all accounts The Pythias were deemed to be very worldly and their knowledge covered history, mathematics, philosophy, religion, politics. Sadly our modern economists know only about one thing, ..err economics.They are theorists and as such their spurious but some times well intentioned advice can cause us a great of distress and and lose us money. That's not to say they are all bad, most professional ones seem to be though. So don't believe the hype, if soothsayers can bankrupt Croesus they can certainly take you down.
Beware geeks bearing gifts of economic forecasts.
RB
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To be honest, the comments to your blog are even better than the blog itself!
The one above is pure class!
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The one above is pure class!
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