Monday, August 03, 2009

The Choosen One

Today's comments by Nouriel Roubini that there might be "light at the of the tunnel" are really only notable because of who is saying it. Roubini is one of several star economists/analysts that have come out of the recent crisis. Meredith Whitney and Nassim Taleb are two others that come quickly to mind.

Its funny how short the media's (and the investing public's) memory is. Both seem to want to find the analyst who has it all figured out. As though someone actually has the proverbial crystal ball. Every cycle the media finds the people who called the big move correctly. Today its Roubini and Whitney. But 10 years ago it was Henry Blodget and Mary Meeker.

Think about what made someone like Mary Meeker a star. She basically got one big call right: that not only the internet was going to change the world, but that it was also going to capture the imagination of investors. Whether or not you could say she called the formation bubble, she certainly had a good vision on what was driving the moment.

But when that moment passed, did the Mary Meeker's of the world see it coming? Not really. I mean, we know Blodget poked fun at some of his own calls in those infamous e-mails, but I would argue that most of the star analysts believed in the internet, even if they didn't believe in all the specific companies involved.

Now bear in mind, there is a feedback loop here. You make a bold call, it works, you get interviewed on TV, you get a huge pay raise, every one calls you a genius. Its heady stuff. Check out Henry Blodget's rapid rise on his Wikipedia page sometime. When you parlay a great call on into your dream job, isn't there some psychological impact there? On some level, wouldn't you start to think to yourself, "Gee, when I tell every one to buy, all sorts of rewards come my way. All the guys saying 'sell' are looking for work."

These analysts understood what was going on in the market and in the economy at a specific moment in time. They were smart people, to be sure, but they didn't have some sort of transcendent understanding of markets. They just had a better feel for that market, that mentality, than anyone else.

I don't see how someone like Meredith Whitney is all that different. She had a better view on banking than most, and she deserves all the credit for that. But let's not pretend like she is the next guru who truly understands banking above all others. Every story about her is prefaced by saying that she "predicted" the financial crisis. But really, does she know more about banking than people like Richard Bove? That guy apparently liked Washington Mutual stock in May 2008, according to one story I pulled up off a web search. Is he an idiot and Whitney a genius? It isn't all that simple is it?

My problem is that investors aren't really served by this deification of people who have gotten the short-term calls right. Professional traders will tell you they make about as many bad trades as good, you just try to set it up such that your good trades pay off more than your bad trades lose. But the media doesn't teach this lesson. Instead, they implicitly tell you that Nouriel Roubini has it figured out. That if only you had listened to him, your 401k wouldn't have dropped by half. Hell, CNBC often teases their interviews with stuff like, "Coming up, the analyst who called the banking crisis! See where she says the market is going now!"

It isn't about finding smart people. The guys on the CDO-squared desk were smart too. The guys who dove into the bubble were smart too. Alan Greenspan was a smart guy, and he seemed to have as good a grip on markets as anyone... until he didn't.

Take an analyst's good call for what it is. A good call. Nothing more.


Ben Hacker said...

Well said. Very well said. I like to think of this as the signal to noise, or the 'luck/skill' ratio. Most people and the media WANT to believe it is all skill... no one wants to admit to the inherent randomness present in things.


gingersue said...

All analysts act just like blind squirrels in search of acorns.

Applesaucer said...

I've read your blog over the past few years and disagreed with almost every one of your posts. But I think you're smart, so I keep reading.

I agree 100% with this post, however. Also, there were many people warning about the coming financial crisis well-before some of these current "gurus." But for some reason, Roubini, Whitney, etal. seem to get all the pub. Also, even if we conceeded that Roubini is an excellent bank analyst, why is it that people also think that he can call markets and the economy?


Anonymous said...

sometimes an analyst is "in phase" with what is going on at the moment which is valuable. i give them more weight than others until they become "out of phase". bob prector in the '80s comes to mind.

Accrued Interest said...


I knew some day I'd get you to agree with me on something!

I read most analysts more for their insights than their conclusions. Also when I haven't been following a company, it helps to read the reports to get up to speed. Kind of to learn what everyone else already knows. Stuff like are they looking for an aquisition? To be acquired? etc.

In Debt We Trust said...

I listen to some commentators like Jim Rogers and Peter Schiff even though their timing is horrible. But they make good points about US fiscal indebtedness and regulatory capture at the USA's highest levels of government by insidious private interests like Goldman.

Anonymous said...

That why I think Taleb is best of the "chosen one(s)". He predicts that we can't predict. And he was right.

Lord said...

It is at least much better than continuing to ask those who never see anything coming what is next as happens so often in the media.

Nouriel Roubini said...

Nouriel Roubini Says Commodity Prices May Rise in 2010

Sean said...

If you want some good color on Whitney & Taleb (and Gasparino for good measure) and their "great" calls, you should look up janet tavakoli's piece on their track records.

Actually, no need to look up, here is the link:

Here is another analysis of Meredith Whitney's Citibank calls:

Some Interesting reads there. As a previous commenter said, Jim Rogers nailed it (and as far as I can tell, got the timing right).

Flow5 said...

Today forecasting is an iffy thing. But prior to 1996 it wasn't. As opposed to Milton Friedman there are no such things as long and variable monetary lags.

The G.6 is on the St. Louis Feds database, i.e., FRASER (Bank Debits & Deposit Turnover). There isn't one lag but there are two lags, one for real growth and one for inflation. These lags are fixed.

The Bank Credit Analyst used the one for real growth. And there is only one option for inflation. Using these in combination it is literally impossible to miss any forecast (under 1 year).

The rates-of-change in legal reserves mirror these lags but the data is contaminated.

It is more likely that statistical calculations are at odds with the real world, estranged from scientific economics, inconsistent with mathematical modeling, not because of faulty economic theories, but because of non-conforming, or non-existent, raw data.

As such accurate forecast are difficult to pin down.