Conflicting views about the economic outlook

Here are two extracts:

The first from Prof. Nouriel Roubini in his RGE Monitor of today’s date:

A number of economic and financial variables have exhibited signs of improvement recently even if macro indicators are still mixed. The pace of economic deterioration has slowed significantly, and after four quarters of severe contraction in economic activity, RGE Monitor now forecasts that the U.S. will display positive real GDP growth in the second half of 2009. As discussed below, however, that does not mean that the recession in the U.S. is already over, as many analysts have argued. Indeed, all the variables used by the National Bureau of Economic Research (NBER) to date recessionary periods will continue to contract or display sub-par growth. However, RGE Monitor now anticipates that policy measures and other factors will boost real GDP growth, albeit in a temporary manner, in the second half of 2009. Yet the shape of the recovery (will it be V, U or W?) and other challenges will influence the U.S. economic outlook going forward. According to RGE Monitor, growth will remain well below potential in 2010, while the shape of the recovery will be closer to a U.

The second is from David Rosenberg in yesterday’s Breakfast with Dave:

Are Markets at a turning point?

• Gold testing its 100-day moving average to the downside
• Canadian dollar and the TSX are both seemingly on their way to test their 50-day moving average
• The CRB index and the oil price broke below its 50-day m.a. yesterday
• Another 35 points, or 3.5%, for the S&P 500 to do likewise
• The 10-year Treasury note yield just smashed through its 50-day m.a. and has 20bps to the downside left to test the 100 day m.a.
• The VIX index jumped 15% to 27.89 — last time it was here (July 10), the S&P 500 was sitting at 879 (100 points south of where it closed yesterday)

David A. Rosenberg
Chief Economist & Strategist, Gluskin Sheff

OK, these two extracts are not entirely at opposite sides of the argument but they do reveal a fundamental danger.

Economics is about human behaviours, albeit within a specific area of those behaviours.  So it is not a science as in pure mathematics.  Just look at a few definitions of economics:

… the branch of social science that deals with the production and distribution and consumption of goods and services and their management … (Princeton)

“Economics is the science which studies human behavior as a relationship between ends and scarce means that have alternative uses” (Lionel Robbins, 1932)

“The combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly, form the heart of the economic approach.” (Gary Becker, 1976)

“Economics … explores and tests the implications of assuming that man is a rational maximizer of his ends in life, his satisfactions – what we shall call his self-interest.” (Richard Posner, 1977)

(Trust me, these are just a few taken at random!  But re-read that last one – man is a rational maximizer of his ends in life – when was the last time you saw ‘man’ acting rationally!)

So what’s this ‘fundamental danger’?  It’s this.

So many voices that we listen to, many in the media, come over as really knowing what is going to happen in terms of the economic outlook.  Even if you pay for expensive financial advisers you don’t remove this fundamental danger.

NOBODY KNOWS FOR SURE WHERE YOUR NATIONAL ECONOMY (OR THE

GLOBAL ECONOMY) IS GOING TO BE IN 2, 5 OR 10 YEARS TIME!

Never invest on the assumption that the future is certain.  It’s about people!

Hopefully, that’s clear!

By Paul Handover

• Business
• Core thought
• Economics