"It's tough to predict stuff, especially when it's in the future" - Yogi Berra
I don't know if baseball's inimitable sage really said that, but he is reputed to have said it, or words to that effect. If he didn't say it, he should have.
But we all have to make decisions in the face of an uncertain future. These decisions are based on a whole bunch of assumptions, some explicit, but mostly implicit. Tomorrow will be somewhat like today. The sun will rise, bills will come due, people will still accept dollars to pay them, and on and on.
Among the assumption and predictions I find most amusing are those by financial writers and self-proclaimed financial gurus. Such predictions and advice is usually hedged in such a way that they are "right," more or less anyway, no matter which way markets turn.
Most disingenuous is the economic snake oil pitched by suede shoe artists trying to peddle their advice through their costly, and mostly worthless, financial newsletters. The typical pitch is, "If you had followed my advice and bought stocks a, b, and c, you would now be wealthier by x (some fantastic) percent." This is, of course, selective memory. They omit previous recommendations that turned out to be dogs.
Most of these pitches begin with misgivings, some legitimate but mostly imagined, about national economic policies. "Excessive government spending," is almost always cited - "surely the chickens will come home to roost." The Fed's expansionary monetary policy with its low interest rates is often denigrated as irresponsible, ostensibly leading to collapse of the dollar and hyperinflation.
But would these fear mongers really recommend that Bernanke and the Fed increase interest rates during recession and an anemic economy? I think not.
These newsletters invariably claim that subscribers can avoid impending financial disaster, and profit handsomely by following their sage advice.
Many of these sales pitches aim their invective at Democrats, probably under the assumption that potential subscribers, well-heeled investors, are mostly Republican. Never mind that even though Republicans are generally more friendly to Wall Street, financial markets historically have done as well, if not better, under Democratic administrations than under Republican. After all, it's not facts that sell financial newsletters. Rather, it's emotions, some combination of greed and fear (same combination that drives the markets in general), and the naive belief or hope on the part of suckers that these snake oil salesmen have the magic formula for quick and certain riches.
But back to the necessity of making real world decisions in an uncertain world. As this is written the Dow-Jones Industrial and the Standard and Poor 500 indices are flirting with record territory - in nominal, not inflation-adjusted terms, that is. The popular press is more enamored with the Dow than the S&P, even though the capitalization-weighted S&P index of 500 stocks is more relevant then the price-weighted Dow index of only 30 stocks - a minor point, but another instance of the mainstream press dumbing down basic stuff. But I digress.
The "bears," believing markets will fall, remind us that the S&P has risen a healthy 26 percent in 2013 - it can't go on forever. As corporate profits are high mainly because of cost cutting, especially low labor costs, unemployment remains high. You don't lose money by selling too soon, at a profit. So bail out when you can.
The "bulls," believing markets will rise, remind us that corporate profits are high. The economy is improving, however slowly. As current price/earnings ratios of the S&P are still somewhat below historical averages, there is still room on the upside. Don't fight the tape - go along with it.
So, pick your poison. Silliest of all is the concern of the gurus over the Fed's eventual "tapering," or reduced purchases of government bonds that would be "bad for the markets. "If "tapering" is in conjunction with a stronger economy, seems that this should be positive rather than negative for markets. But then in the world of financial markets, perception is reality, at least in the short run.
So we, including we economists, can't predict short run fluctuations in financial markets. If Warren Buffet says he can't do it, who can? Of course he is in position where he doesn't need to. He recommends buying high quality "value stocks," and holding them. Personally, I like that philosophy.
Legitimate financial advisors will come back to standard recommendations of a diversified portfolio of real and financial investments, based on individual risk tolerance, income, goals, and stage in life - obviously a highly individual matter.
And forget about avoiding risk - there is no such thing. Federally insured bank deposits, for which preservation of capital is guaranteed in nominal terms, are useful for short term operating funds. But they lose real value in the long run through even mild inflation.
Although some of my Republican friends may disagree, the federal government can reduce risk at both the individual level and the macroeconomic level by strengthening Social Security and Medicare programs. Social Security payments flow to recipients regardless of the status of financial markets, creating stability at both individual and macroeconomic levels.
A sound Medicare program reduces risk of bankruptcy from illness or accident, and increases the incentive to build for retirement by increasing the probability that one will be able to enjoy it.
These federal programs are not a substitute for individual savings, investment, and retirement planning. However, they provide a solid foundation upon which the individual can build private retirement accounts, starting early and benefiting from compounding. These federal programs should be strengthened, not weakened.
To all this, I add the recommendation that one live below one's means - difficult to do in a culture that urges living beyond one's means.
This sounds like unexciting, boring advice. But then, I'm an economist, and Swiss, neither of which is reputed to be exciting. But it's preferable to succumbing to economic snake oil.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds. net.
I don't know if baseball's inimitable sage really said that, but he is reputed to have said it, or words to that effect. If he didn't say it, he should have.
But we all have to make decisions in the face of an uncertain future. These decisions are based on a whole bunch of assumptions, some explicit, but mostly implicit. Tomorrow will be somewhat like today. The sun will rise, bills will come due, people will still accept dollars to pay them, and on and on.
Among the assumption and predictions I find most amusing are those by financial writers and self-proclaimed financial gurus. Such predictions and advice is usually hedged in such a way that they are "right," more or less anyway, no matter which way markets turn.
Most disingenuous is the economic snake oil pitched by suede shoe artists trying to peddle their advice through their costly, and mostly worthless, financial newsletters. The typical pitch is, "If you had followed my advice and bought stocks a, b, and c, you would now be wealthier by x (some fantastic) percent." This is, of course, selective memory. They omit previous recommendations that turned out to be dogs.
Most of these pitches begin with misgivings, some legitimate but mostly imagined, about national economic policies. "Excessive government spending," is almost always cited - "surely the chickens will come home to roost." The Fed's expansionary monetary policy with its low interest rates is often denigrated as irresponsible, ostensibly leading to collapse of the dollar and hyperinflation.
But would these fear mongers really recommend that Bernanke and the Fed increase interest rates during recession and an anemic economy? I think not.
These newsletters invariably claim that subscribers can avoid impending financial disaster, and profit handsomely by following their sage advice.
Many of these sales pitches aim their invective at Democrats, probably under the assumption that potential subscribers, well-heeled investors, are mostly Republican. Never mind that even though Republicans are generally more friendly to Wall Street, financial markets historically have done as well, if not better, under Democratic administrations than under Republican. After all, it's not facts that sell financial newsletters. Rather, it's emotions, some combination of greed and fear (same combination that drives the markets in general), and the naive belief or hope on the part of suckers that these snake oil salesmen have the magic formula for quick and certain riches.
But back to the necessity of making real world decisions in an uncertain world. As this is written the Dow-Jones Industrial and the Standard and Poor 500 indices are flirting with record territory - in nominal, not inflation-adjusted terms, that is. The popular press is more enamored with the Dow than the S&P, even though the capitalization-weighted S&P index of 500 stocks is more relevant then the price-weighted Dow index of only 30 stocks - a minor point, but another instance of the mainstream press dumbing down basic stuff. But I digress.
The "bears," believing markets will fall, remind us that the S&P has risen a healthy 26 percent in 2013 - it can't go on forever. As corporate profits are high mainly because of cost cutting, especially low labor costs, unemployment remains high. You don't lose money by selling too soon, at a profit. So bail out when you can.
The "bulls," believing markets will rise, remind us that corporate profits are high. The economy is improving, however slowly. As current price/earnings ratios of the S&P are still somewhat below historical averages, there is still room on the upside. Don't fight the tape - go along with it.
So, pick your poison. Silliest of all is the concern of the gurus over the Fed's eventual "tapering," or reduced purchases of government bonds that would be "bad for the markets. "If "tapering" is in conjunction with a stronger economy, seems that this should be positive rather than negative for markets. But then in the world of financial markets, perception is reality, at least in the short run.
So we, including we economists, can't predict short run fluctuations in financial markets. If Warren Buffet says he can't do it, who can? Of course he is in position where he doesn't need to. He recommends buying high quality "value stocks," and holding them. Personally, I like that philosophy.
Legitimate financial advisors will come back to standard recommendations of a diversified portfolio of real and financial investments, based on individual risk tolerance, income, goals, and stage in life - obviously a highly individual matter.
And forget about avoiding risk - there is no such thing. Federally insured bank deposits, for which preservation of capital is guaranteed in nominal terms, are useful for short term operating funds. But they lose real value in the long run through even mild inflation.
Although some of my Republican friends may disagree, the federal government can reduce risk at both the individual level and the macroeconomic level by strengthening Social Security and Medicare programs. Social Security payments flow to recipients regardless of the status of financial markets, creating stability at both individual and macroeconomic levels.
A sound Medicare program reduces risk of bankruptcy from illness or accident, and increases the incentive to build for retirement by increasing the probability that one will be able to enjoy it.
These federal programs are not a substitute for individual savings, investment, and retirement planning. However, they provide a solid foundation upon which the individual can build private retirement accounts, starting early and benefiting from compounding. These federal programs should be strengthened, not weakened.
To all this, I add the recommendation that one live below one's means - difficult to do in a culture that urges living beyond one's means.
This sounds like unexciting, boring advice. But then, I'm an economist, and Swiss, neither of which is reputed to be exciting. But it's preferable to succumbing to economic snake oil.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds. net.
