You cannot regularly read a daily newspaper or view television news without continual exposure to economic predictions by experts. For example, I recently learned, "The financial panic is behind us. The bottom has come in stocks." This announcement came from no lesser luminary than the wealthiest man in the world, Berkshire Hathaway CEO Warren Buffett. In another pronouncement, Dr. Scott Anderson, senior economist for Wells Fargo & Company, expressed the same view when he said "The ongoing impact of $2 trillion in government stimulus, with other factors such as pent-up consumer demand and returning consumer confidence, will finally lead to a turnaround, and the third quarter [of 2009] will be better than expected by many." A similar refrain was echoed by Federal Reserve Chairman Ben Bernanke who told the Senate Banking Committee, "... there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery."
Despite the favorable forecasts, the economy is not improving. Unemployment rates continue to rise, home foreclosures persist unabatedly, bankruptcies are being filed at a frantic pace, while the federal government bails more of the nation's firms out of financial distress. How can these experts issue optimistic predictions as they ignore the nation's obvious miseries? There are four justifiable reasons to be skeptical of economic pronouncements. In each case, you must consider the source from which these predictions come.
No. 1: Career prognosticators. These include scholars, economists and various anointed authorities. To these individuals, economics is a pseudoscience, rooted in theory, from which they derive a livelihood through their familiarity with established dogma and terminology. Their involvement usually arises from an academic post, the lecture circuit, sale of books or articles, a governmental position, or appointment to boards and commissions. Most have never conducted a business, actively pursued investments, or met a payroll. Though they're proficient in the use of words, few possess any real understanding of sound investment or the talents which must be employed to sustain a profitable enterprise.
No. 2: Those with a vested interest. Should the president of the National Association of Realtors (NAR) be asked at any time to comment on whether the real estate climate is favorable for the purchase and sale of properties? You needn't wonder what the answer will be. Any person occupying that position who might suggest now is not the right time to buy or sell -- which of course generates a commission for a dues-paying member of the organization -- will soon be the ex-President of NAR. Similarly, if you inquire of an official at any marketing firm specializing in the sale of gold, you will be assured there's no better time to invest in precious metals than now. Though gold currently sells at about $1,120 per ounce, quadruple its price as recently as January 2002, it seems not a matter of consideration. The party line is fixed: No matter what its price, "... knowledgeable sources predict the price of gold could double over the next two years." And so it goes. Prognostications by people who profit from the advice they offer, either directly or indirectly, must be recognized as such and largely ignored.
No. 3: Media representatives. Just as it is the obligation of a newspaper's financial columnist to regularly fill a certain number of square inches of the paper with revealing information, a television news commentator is required to expound articulately for a stipulated time period. As their training is normally in journalism, not economics, they will likely not possess the same background as the career economic prognosticator described above. As a result, they often rely on others to provide the information and statistics from which they weave their economic predictions. It might be argued that their prognostications are increasingly devoid of substance, being one more step removed from the source. However, as these purveyors of opinion specialize in the astute delivery of words, their presentations can be persuasive. I normally pay attention to what they say and write, mostly for its entertainment value, and take their advice with a grain of salt. Never forget it's their job to harbor a recordable view on whatever subject they may be called upon to expound. This is not a formula on which you can rely.
No. 4: Knowledgeable participants. There is a fourth group of individuals that is in a far more favorable position to accurately report what is going on in the economy, as well as what the future may truly hold. These are persons with a working knowledge in their particular field of expertise, who actually know of what they speak. Unfortunately, you may not depend upon their utterances as conveying sound or objective information. Many of these persons have learned, due to the dog-eat-dog nature of the business world, to play it close to the vest. Whatever they say is often couched in ambiguity. There are others capable of providing true insight into a market or specialty, but they fear giving away vital information on their techniques. They don't want competition and will try to deceive whenever they can. There are still others, with practices less than ethical, who will never dare be candid. The corners they cut are not revelations they want exposed. I knew of one successful investor who professed to live by the adage, first attributed to the late railroad magnate James J. Hill: "It is not possible to conduct any profitable enterprise in strict accordance with the law."
At this point, I'll now provide you with my opinion of exactly where the economy is headed. I confess to not knowing whether we are in the third year of a five-year recession or the third year of a 16-year depression. It's a complete mystery to me. And despite my abysmal lack of insight, I'm confident I know as much about it as does Barack Obama, Ben Bernanke, and Alan Greenspan, all rolled into one. As I'm not certain into which of the four categories I fall, you may accept my prediction at your own peril.
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