Why Investors Should Ignore Economists

From the Daily Ticker

Ben Bernanke, chairman of the Federal Reserve and inarguably one of the most important economists today, has publicly chided his fellow economic brethren for their inability to correctly forecast the future.

“Economics is a highly sophisticated field of thought that is superb at explaining to policymakers precisely why the choices they made in the past were wrong,” he told Princeton University graduates this May. “About the future, not so much.”

This week Bernanke and other central bankers will convene in Jackson Hole, Wyo., for their annual summer retreat. They’ll speculate, they’ll pontificate and they’ll ruminate about how to fix the sluggish U.S. economy and boost job growth. Solutions and proposals will be shared and debated. But very few of this year’s attendees will accurately predict how the U.S. or global economy will perform next year.

For these reasons investors are better off tuning out the economic noise, says Barry Ritholtz, CEO of Fusion IQ and CIO of The Ritholtz Group.

“Economists distract investors from what’s important,” he tells The Daily Ticker.

Ritholtz points to the monthly nonfarm payrolls number as a perfect example of what he’s talking about — a data point that is closely tracked by investors, economists and policymakers. An upside surprise in the jobs report could lead to a 100-point spike in the Dow Jones Industrial Average. Yet a number that misses the consensus estimate could send U.S. markets plunging. Ritholtz says these diversions confuse investors and cause them to take their eye off the [investing] ball.

“The jobs report is overrated… it’s meaningless,” he says. “All we care about are the long-term trends: is the economy creating jobs? Are wages going up or are wages flat? What does this mean relative to inflation?”

Not quoted is the fact that economic data is aways revised in subsequent periods.  The GDP (Gross Domestic Product) number is revised for years after the first “guesstimate” is issued.  The payroll employment number is also misleading, not only because the actual number is always compared to the “expected” number (who cares?) but also because unemployment numbers are “adjusted” and depend on the estimates of the number of people in the work force.  If enough people leave the work force, “unemployment” drops.  As an example, if everyone stopped looking for work because they are so discouraged, the official unemployment number would drop to zero.  Another way that employment numbers are distorted is that part-time jobs are counted the same as full-time jobs.  If 10 full-time workers are fired and replace with 20 part timers, the jobs report shows a gain of ten jobs.  You can often learn a great deal more about the economy by looking around you that by studying government statistics.

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