Seminar Countdown

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The Federal Reserve will keep its version of the monetary printing press running a while longer, though Chairman Ben Bernanke provided hints Wednesday that the days of extreme easing are coming to a close.

Past performance is not indicative of future results. Futures and Options trading carry a substantial risk of loss and may not be suitable for all investors. The addition of managed futures to an investor’s portfolio does not mean that the portfolio will be profitable or that it will not experience substantial drawdowns.

At a news conference, the central bank chief said if the economy continues to improve the asset-purchasing program could start winding down towards the end of 2013 and wrap up in 2014.

Markets sold off aggressively on the news, with major averages dropping nearly 1 percent. The five-year Treasury note hit its highest yield since August 2011 while the benchmark 10-year note hit a 2011 high.

In a decision eyed with a surgeon’s precision on Wall Street, the central bank’s Open Market Committee tiptoed around the vaunted “tapering” question, saying it will continue watching the economy for more gains.

The Fed itself more or less met market expectations for this week’s meeting, though some traders thought it would lay out a groundwork that could lead to at least a modest tightening of its $85 billion a month bond-buying program by September.

At a subsequent news conference, Bernanke said scale-backs in the asset purchasing program will only happen if the economic data gets better. Interest rate hikes, he said, are a separate issue and “still far in the future.”

While the Fed’s economic forecast indicated some mild optimism for growth, Bernanke said investors shouldn’t read too much into that in terms of Fed policy.

“If you draw the conclusion that I’ve just said that our purchases will end in the middle of next year, you’ve drawn the wrong conclusion, because our purchases are tied to what happens in the economy,” he said.

In other matters, Bernanke refused to address questions about his future at the Fed as his second term winds to a close. President Barack Obama caused a stir this week when he said the chairman had stayed on longer than he intended.

The Fed statement changed little from the May meeting, though it did sound a modestly upbeat note on the economy.

“We pretty much have a Fed statement and summary of economic projections that leave us believing what we believed yesterday, which is the Fed is going to taper at some point, maybe at the end of this year, maybe in 2014,” said Art Hogan, managing director at Lazard Capital Markets.

Bernanke said discussion at the meeting did yield one other change: A desire to hold onto its mortgage-backed securities, which it is buying to spur economic growth.

“While participants continue to think that in the long run the Federal Reserve portfolio should consist predominantly of Treasury securities, a strong majority now expects that the committee will not sell agency mortgage-backed securities during the process of normalizing monetary policy,” he said.

In its economic projections, the committee modestly raised its expectations for gross domestic product growth for 2014, from 2.9 to 3.4 percent to 3.0 percent to 3.5 percent. Bernanke had never presided over an economy that grew more than 3 percent on an annualized basis.

“The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall,” the statement said.

(  Read the full Fed statement here )

Markets have been intent on finding signs for when the Fed will end its    quantitative easing program, which has driven the central bank balance sheet to $3.45 trillion and sparked worries about asset bubbles in risk assets.

The Fed credits itself with funds that it uses to buy Treasurys and mortgage-backed securities.

As part of a historic level of easing, the Fed also has kept its target funds rate near zero, where it will stay until unemployment falls to 6.5 percent and inflation rises to 2.5 percent. The jobless rate currently stands at 7.6 percent while inflation is tracking at 1.4 percent.

“Wall Street has already traded out those statements and bulls will now focus on the comments about the likelihood of an increase in rates not occurring until 2015,” said Todd Schoenberger, managing partner at LandColt capital in New York. “Keeping rates low indicates a continued bull run in equities for the foreseeable future.”

In its statement Wednesday, the Fed forecast the jobless target will be hit in 2014. It also cut its inflation outlook.

Critics also have wondered why the central bank continues in extreme easing mode even though the economy is well enough the financial crisis-era levels and the S&P 500 stock index has gained more than 140 percent since the March 2009 lows.

In anticipation that the Fed will unwind the third leg of QE, stocks have been choppy though generally higher while the 10-year Treasury yield has climbed to 2.21 percent, recently hitting its highest level since late-March 2012 and up more than half a percentage point from the 1.66 percent at the May fed meeting.

 

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John Mauldin takes down the business of economic forecasting in his new weekly letter.

Past performance is not indicative of future results. Futures and Options trading carry a substantial risk of loss and may not be suitable for all investors. The addition of managed futures to an investor’s portfolio does not mean that the portfolio will be profitable or that it will not experience substantial drawdowns.

“If you look at the history of the last three recessions in the United States, you will see that the inability of economists and central bankers to understand the state of the economy was so bad that you might be tempted to say they couldn’t find their derrieres with both hands,” wrote Mauldin. “Economists have yet to correctly call a recession.”

For those who don’t have time to read Mauldin’s lengthy letter, there’s one chart that sums up his thesis nicely. It comes from Societe Generale, and it shows economists’ consensus forecasts for GDP growth.  As you can see, it never goes negative during this 35 year span.

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I came across a compelling report the other day – a research paper on the portfolio performance of several large U.S.-university “Super Endowments.” These funds have soundly beaten traditional portfolios over the past decade, and they’ve done it with considerably less risk/volatility.

Past performance is not indicative of future results. Futures and Options trading carry a substantial risk of loss and may not be suitable for all investors. The addition of managed futures to an investor’s portfolio does not mean that the portfolio will be profitable or that it will not experience substantial drawdowns.

How? By taking a fundamentally different approach to asset allocation; specifically, their exposure to alternative assets. That is, hedge funds, private equity, managed futures, real estate (multi-unit residential, commercial, industrial), commodities, customized structural products, infrastructure, etc.


Performance

(per cent)

percentage of alternative assets
U.S. Equity/bond portfolio (60/40) 4.6 0
Average U.S. endowment fund 5.6 53
Top 20 U.S. endowment funds 8 59
Top 5 U.S. “Super Endowment” funds 9.7 72
Yale/Harvard “Super Endowments” 9.6 69

Source: Frontier Investment Management. Data as at June 2011

What I find most interesting here is the performance advantage vs. the traditional “60/40” equity/fixed income portfolio. As I’ve said before, this is the “go-to” portfolio for many investors (including the pension fund industry), and I believe we’re coming into a time when it may well be obsolete. As the above data makes clear, a possible solution to this problem is to boost your allocation to alternative assets.

The topic of alternative assets has been an important topic within the high-net-worth population for the past several years. More and more HNW investors have become aware of the performance of these endowment funds – and more of them have looked to emulate these large endowment funds in their own portfolios.

From the discussions I’ve been involved with, this has less to do with performance enhancement than you might think (although make no mistake, that’s an important goal). Rather, it usually has a lot more to do with diversification and downside or “Value at Risk” (VAR) protection.

This attitude goes back to the 2008 market crisis; one of the most striking things about that crisis was that there weren’t a lot of places to hide. That is, most asset classes declined at the same time or had significantly increased correlation. One of the things these large endowment funds were able to do was to sidestep the crisis, because of their allocations. Sure, their portfolios declined. But they didn’t decline nearly dramatically as the broader market.

This has become a significant issue for HNW individuals, as well as the broader investment public. As the world becomes more economically interconnected, assets have become more correlated, and it has become more and more difficult to find assets that “zig” when everything else “zags.”

Looking closer at the allocation of the two Super Endowments, you can see how well diversified they really are – geographically, and by asset allocation.

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It’s easy to forget, especially in the excitement of the recent new market highs, that not only a cyclical bear market, but also a secular bear market began when the market topped out in 2000.

Past performance is not indicative of future results. Futures and Options trading carry a substantial risk of loss and may not be suitable for all investors. The addition of managed futures to an investor’s portfolio does not mean that the portfolio will be profitable or that it will not experience substantial drawdowns.

None other than Warren Buffett warned in November 1999 that “Over the next 17 years equities will not perform anything like – anything like – they’ve performed over the last 17 years.”

When Buffett made his perceptive forecast in 1999 the market had been in a typical 18-year secular bull market since 1982, and had become extremely overbought in the process.

Over the last 110 years the market has cycled fairly regularly between secular bull markets that lasted up to 18 years, and sideways secular bear markets that typically lasted about 17 years.

In a secular bull market there are periodic bear markets, but they are usually brief, and then the next cyclical bull market takes over and carries the market onward and upward to ever higher new highs.

In a secular bear market, periodic cyclical bull markets take place that carry the market back up to the vicinity of its previous peaks. But then the next bear market takes over, the market tops out again, and the long-term sideways secular bear market continues.

The last secular bear market ran from 1965, when the Dow reached 1000 for the first time ever, until 1982, when it reached 1000 for the sixth time in 17 years, and finally kept going into the 18-year 1982-2000 secular bull market.

In the current cyclical bull market that began in 2009, within the secular bear market that began 13 years ago in 2000, the market recently again reached its previous peaks of 2000 and 2007, and this time exceeded those peaks.

But rather than the excitement and bullishness that has created, it might be more appropriate to consider whether the secular bear market remains in place.

Because if it does, the current situation of the S&P 500 looks ominously similar to when the Dow returned to its previous two peaks in 1973, and broke out to a new high, which had investors excited, bullish, and convinced that the secular bear was over. But the next cyclical bear was even worse than the previous two.

So is the current secular bear market over? Is the current bullishness and confidence justified?

A few observations:

If the current secular bear is over it will be the shortest one in the last 110 years.

Then there is the fact that there have been 25 bear markets over the last 110 years, one on average of every 4.4 years. The bull market that began in March, 2009 is now 4.2 years old.

We are also in the first year of the Four-Year Presidential Cycle. The historical pattern is that the first year or two of the cycle tend to be negative, while the last two years of the cycle tend to be positive. The catalyst for the pattern seems to be that each administration wants to see any problems for the economy or the stock market take place in the first two years of the term. They then have time to pull out all the stops in the third and fourth year, to make sure the economy and markets are recovered and positive by the time the next election rolls around.

Then we also have the remaining serious situations created by the 2008 financial collapse that still must be tackled at some point down the road, with their impact unknown. They include the record global government debt loads, the reversal of the unprecedented massive stimulus efforts of central banks, including the U.S. Fed, the return of near zero interest rates to more normal levels, and so on.

We also have a number of conditions that are not comforting if you think about conditions at the market top in 2007, including very bullish investor sentiment, record margin debt (confident investors buying stock with 50% down-payments), consumer confidence, auto sales, home sales, etc. being described as at “levels not seen since 2007”.

That’s similar to conditions during the last secular bear market of 1965-82. Some issues would be resolved, supporting the periodic bull markets, only to have it realized that other unusually serious problems remained to be solved. In those times it was the Vietnam war, runaway inflation, oil embargoes by OPEC, repeated economic recessions, political scandals (Watergate, Nixon’s resignation, etc.), and then record government debt and budget deficits incurred in trying to pull the country out of the malaise of the 1970’s.

That’s not unlike the current situation of the Iraq and Afghanistan wars, political gridlock, two recessions in 8 years, the still questionable anemic recovery from the last one, record budget deficits and debt loads, and still to come fiscal and monetary reversals of the unprecedented stimulus efforts of the last five years.

Unfortunately, the evidence seems to indicate the secular bear market is not only still with us, but may be near its next critical point.

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The agency said the scale of credit was so extreme that the country would find it very hard to grow its way out of the excesses as in past episodes, implying tougher times ahead.

Past performance is not indicative of future results. Futures and Options trading carry a substantial risk of loss and may not be suitable for all investors. The addition of managed futures to an investor’s portfolio does not mean that the portfolio will be profitable or that it will not experience substantial drawdowns.

“The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation,” said Charlene Chu, the agency’s senior director in Beijing.

“There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling,” she told The Daily Telegraph.

While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. “It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property,” she said.

Concerns are rising after a string of upsets in Quingdao, Ordos, Jilin and elsewhere, in so-called trust products, a $1.4 trillion (£0.9 trillion) segment of the shadow banking system.

Bank Everbright defaulted on an interbank loan 10 days ago amid wild spikes in short-term “Shibor” borrowing rates, a sign that liquidity has suddenly dried up. “Typically stress starts in the periphery and moves to the core, and that is what we are already seeing with defaults in trust products,” she said.

Fitch warned that wealth products worth $2 trillion of lending are in reality a “hidden second balance sheet” for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.

This niche is the epicentre of risk. Half the loans must be rolled over every three months, and another 25pc in less than six months. This has echoes of Northern Rock, Lehman Brothers and others that came to grief in the West on short-term liabilities when the wholesale capital markets froze.

Mrs Chu said the banks had been forced to park over $3 trillion in reserves at the central bank, giving them a “massive savings account that can be drawn down” in a crisis, but this may not be enough to avert trouble given the sheer scale of the lending boom.

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. “They have replicated the entire US commercial banking system in five years,” she said.

The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. “This is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial,” she said.

The agency downgraded China’s long-term currency rating to AA- debt in April but still thinks the government can handle any banking crisis, however bad. “The Chinese state has a lot of firepower. It is very able and very willing to support the banking sector. The real question is what this means for growth, and therefore for social and political risk,” said Mrs Chu.

“There is no way they can grow out of their asset problems as they did in the past. We think this will be very different from the banking crisis in the late 1990s. With credit at 200pc of GDP, the numerator is growing twice as fast as the denominator. You can’t grow out of that.”

The authorities have been trying to manage a soft-landing, deploying loan curbs and a high reserve ratio requirement (RRR) for banks to halt property speculation. The home price to income ratio has reached 16 to 18 in many cities, shutting workers out of the market. Shadow banking has plugged the gap for much of the last two years.

However, a new problem has emerged as the economic efficiency of credit collapses. The extra GDP growth generated by each extra yuan of loans has dropped from 0.85 to 0.15 over the last four years, a sign of exhaustion.

Wei Yao from Societe Generale says the debt service ratio of Chinese companies has reached 30pc of GDP – the typical threshold for financial crises — and many will not be able to pay interest or repay principal. She warned that the country could be on the verge of a “Minsky Moment”, when the debt pyramid collapses under its own weight. “The debt snowball is getting bigger and bigger, without contributing to real activity,” she said.

The latest twist is sudden stress in the overnight lending markets. “We believe the series of policy tightening measures in the past three months have reached critical mass, such that deleveraging in the banking sector is happening. Liquidity tightening can be very damaging to a highly leveraged economy,” said Zhiwei Zhang from Nomura.

“There is room to cut interest rates and the reserve ratio in the second half,” wrote a front-page editorial today in China Securities Journal on Friday. The article is the first sign that the authorities are preparing to change tack, shifting to a looser stance after a drizzle of bad data over recent weeks.

The journal said total credit in China’s financial system may be as high as 221pc of GDP, jumping almost eightfold over the last decade, and warned that companies will have to fork out $1 trillion in interest payments alone this year. “Chinese corporate debt burdens are much higher than those of other economies. Much of the liquidity is being used to repay debt and not to finance output,” it said.

It also flagged worries over an exodus of hot money once the US Federal Reserve starts tightening. “China will face large-scale capital outflows if there is an exit from quantitative easing and the dollar strengthens,” it wrote.

The journal said foreign withdrawals from Chinese equity funds were the highest since early 2008 in the week up to June 5, and withdrawals from Hong Kong funds were the most in a decade.

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All of you know how I feel about the Japanese stock market and the economy in general.

Past performance is not indicative of future results. Futures and Options trading carry a substantial risk of loss and may not be suitable for all investors. The addition of managed futures to an investor’s portfolio does not mean that the portfolio will be profitable or that it will not experience substantial drawdowns.

Yes, I was wrong in the past when I suggested traders and investors stay away from the Japanese stock market. The benchmark Nikkei 225 has been the top performer this year; in fact, at one point on May 23, the stock index was up a hefty—though undeserved—70% or so.

Yet despite all of the hoopla regarding how Japanese Prime Minister Shinzo Abe has become a rock star in Japan’s equivalent of Wall Street due to the country’s massive stimulus regime referred to as “Abenomics,” I still remain unconvinced about the Japanese stock market.

Just like the Federal Reserve here with Ben Bernanke, Abenomics is all about driving the economy by flooding the monetary system with easy and, essentially, free money. (Can you say “Ponzi scheme”?) And when money is free, it is expected that consumers and corporations will spend it. But the problem, just like the one we’re experiencing here in America, is that the flow of money down the pipeline will create an artificial Japanese economy that will stay stuck in a recession—despite the growth.

As I mentioned previously in these pages, the flowing of easy money is dangerous because spenders become addicted to the near-zero interest rates.

Just recall the use of the term “monetary cocaine” by Richard Fisher, president of the Dallas Federal Reserve Bank, in reference to the Fed’s stimulus. (Source: “Fed’s Fisher: We Cannot Live in Fear of ‘Monetary Cocaine,’” Reuters, June 5, 2013.)

The failure of the Bank of Japan to offer up new stimulus at last week’s monetary meeting and the subsequent selling in the Nikkei stock market were red flags that we need to watch.

It’s no different from here; just like the U.S., Japan is currently being driven by the easy money—and traders want more of it. Hold back the easy money, and you’ll see the stock market fall.

In the Global Economic Prospects report produced by the World Bank, Japan’s gross domestic product (GDP) growth projection was raised to 1.4% from the previous 0.8%. According to the World Bank, “In Japan, a dynamic relaxation of macroeconomic policy has sparked an uptick in activity, at least over the short-term.” (Source: “Japan growth estimate gets World Bank boost,” The Japan Times News, June 13, 2013.)

The upward revision is encouraging for Japan, but it doesn’t justify the associated rise in the Japanese stock market. Not even close.

Moreover, last year’s launch of Abenomics will add to the already woeful debt levels in Japan, and, just like the massive debt buildup in America, this will not be good.

The Nikkei 225 has retrenched 22% from its high on May 23, and I don’t think a bottom has even been reached yet. I said it before and I will repeat it now: I would stay out of the Japanese stock market.

And just like the United States, Japan will find out very soon that its stock market will be dependent on the flow of easy money to continue its uptick. This is a risky proposition, especially as the global interest rates begin to ratchet higher. And just like America, the Bank of Japan is running a massive Ponzi scheme that could—very simply—collapse.

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It’s the punches you don’t expect that hurt the most. While U.S. traders obsessed over the FOMC unwinding QE, the Bank of Japan came out of nowhere and pricked the bubble of Central Bank intrusion into markets.

Past performance is not indicative of future results. Futures and Options trading carry a substantial risk of loss and may not be suitable for all investors. The addition of managed futures to an investor’s portfolio does not mean that the portfolio will be profitable or that it will not experience substantial drawdowns.

Thursday saw Japan’s Nikkei 225 (^N225) benchmark drop another 6.4%. The loss is the equivalent of nearly 1,000 Dow points. The Nikkei has lost more than 1/5th of its value since May 23rd. A 20% drop fits the technical definition of a Bear Market but don’t be fooled. The Nikkei isn’t slumping into bear territory. It’s crashing.

Japanese stocks are collapsing despite active and massive intervention by its Central Bank. The Nikkei has now given back all but a fraction of the explosive gains made in the wake of Bank of Japan Governor Haruhiko Kuroda’s public commitment to do whatever it takes to jump start the world’s third largest economy.

Meanwhile yields on U.S. 10yr treasuries fell to just under 2.2% as focus on next week’s Fed Meeting shifts from whether or not Bernanke will taper to whether or not the FOMC is as impotent as the BoJ seems to be.

Conventional wisdom has long held that Treasury rates would skyrocket as soon as QE was unwound. Ignored by most is the fact that long-held economic truths have been getting discredited one-by-one for five years. Inflation has not spiked. Deflation has been avoided. There hasn’t been a meltdown, a bubble, or a recovery. As Japan illustrates, equities are hardly a sure thing either. Economists are fighting to take credit for scraps with the impotency of their “science” there for all to see.

So where does money go when all other markets fail? It goes to “risk-free” government securities. That means U.S. paper. The U.S. is the only non-emerging industrialized nation on earth with reliably positive GDP growth. The yield is almost nothing but that looks pretty good compared to the risk/reward profile of an investment in Japanese stocks.

Fed Chairman Bernanke has said repeatedly he’ll be forced to tighten monetary policy if inflation exceeds 2% and/or the unemployment rate drops below 6.5%. Current levels for inflation and unemployment are roughly 2% and 7.6%, respectively. The Fed isn’t going to stop the presses now that Japan is dropping into a sinkhole.

In light of what’s happening in Japan, Fed “tapering” means nothing. The grim reality taking shape is that U.S. paper isn’t priced as far off the free market rate as people think. A world so unsafe that getting 2% for 10-year treasury is a more frightening prospect than marginal tweaks to monetary policy by the FOMC.

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As political gridlock in Washington threatens to stall a U.S. economic recovery, investors are once again turning to economists for guidance on what the future holds. But a Ouija board may serve them just as well. From Federal Reserve chairman Ben Bernanke on down, most economists failed to predict the 2008 financial crash. In his 2011 paper, “An Award for Calling the Crash,” Mason Gaffney, a professor of economics at the University of California, Riverside, offers this postmortem: “The crash of 2008 surprised most of us. The episode has led many to ask how economists could have been so in the dark.”Past performance is not indicative of future results. Futures and Options trading carry a substantial risk of loss and may not be suitable for all investors. The addition of managed futures to an investor’s portfolio does not mean that the portfolio will be profitable or that it will not experience substantial drawdowns.

And this wasn’t an isolated event. The majority of economists have been surprised by everything from the Great Depression and the spike in oil prices during the 1970s to the bursting of the dotcom bubble in 2000 and 2001, says Laurence Ball, a professor of economics at Johns Hopkins University. What made it difficult to predict the mortgage crisis was that “subprime mortgages did not really exist 15 years ago,” he says. Economists look at past events to figure out what’s coming next, but some events are without precedent. “The world changes quickly,” Ball says.

Such explanations provide little solace for regular investors, many of whom look to economists as bellwethers. “You can’t create a model for the world. Even in projecting interest rates, income and inflation, too much can go wrong,” says Robert Schmansky, founder of Clear Financial Advisors in Bloomfield Hills, Mich. And when economists don’t forewarn others, he says, investors suffer. In late 2008 as stocks were free-falling, Schmansky says, many of his clients were scrambling to liquidate their stock portfolios because they too were caught by surprise.

In their defense, economists tend to make decisions based on publicly available information just like everyone else, says Ken Simonson, current president of the National Association for Business Economics, an international association for applied economists, strategists, academics, and policy-makers. Still, he admits, before the financial crisis, “The majority of economists did take way too rosy a view of what was happening in the economy.”

2. “…but we may help cause it.”
While rosy forecasts can leave investors unprepared for disaster, experts say pessimism from economists can contribute to a crash. “Juicy sound bites by economists can impact consumer confidence,” says Seth Rabinowitz, partner at management consulting firm Silicon Associates. Among the factors that influence consumers’ decisions to spend, he says, are income, stock market volatility — and what economists say. “If consumers are overly fearful, they will spend less and that will hurt an economy on the brink of recovery,” he says. “For this reason, economists have an even greater social responsibility in how they speak to the press,” he says.3. “We’re not above a little guesswork.”

Given that economists’ models did little to help alert them to the impending problems in 2008, a growing number are now learning to trust their gut, say experts — that is, they’re guessing. These are educated guesses, to be sure, but guesses nonetheless. Mark Perry, a professor of finance and business economics at the University of Michigan-Flint, estimates that more than half of economic forecasts are based on intuition. “Over time, economists have started to realize that people are unpredictable,” he says, and that’s forced them to diverge from what more formal models might predict.

Others say using a little guesswork may not necessarily be a bad thing, arguing that mathematical models are often rendered useless in the real world, especially when dealing with events like the terrorist attacks on Sept. 11, 2001 and other unanticipated disasters. These models assume consistency and predictability when actual behavior is hard to predict, says John Kay, one of Britain’s leading economists. “Relying on consistency is not very sensible strategy,” he says.

“Any professional economist or researcher has to use a certain amount of judgment and creativity either to detect relationships that haven’t been noticed by others or to sort through the many influences that are affecting the economy,” says Simonson of the National Association for Business Economics. No period in time can be replicated based solely on a mathematical model. “That’s why people say economic forecasters exist to make weather forecasters look good,” he says.

4. “Those bold predictions? Blame the testosterone.”

Most economists are male. Only about 30% of new Ph.D. economists are female, a proportion that has increased only modestly since 1995, according to research compiled by economists John Siegfried and Charles Scott and published in the American Economic Review. The imbalance is particularly striking because men are the minority in many other financial professions. Female accountants and auditors, tax preparers, insurance underwriters, tax examiners and collectors all outnumber their male counterparts, according to the Department of Labor’s Women’s Bureau.

Some commentators say the imbalance among economists could have repercussions for economic policy. According to a 2012 survey of American Economic Association members published in the Contemporary Economic Policy Journal, male and female economists think differently about issues including educational vouchers, health insurance and policies toward labor standards. Compared with men, women in the study were 24 percentage points more likely to believe that the the role of the government in the economy is either “too small” or “much too small,” and women were 32 percentage points more likely to agree that government policies should attempt to make the U.S. income distribution more equal.

Several other studies, including one in 2011 by Barclays Wealth, a private banking and wealth management firm, and Ledbury Research, a market research firm based in London, have also concluded that men tend to engage in more reckless behavior than women. One possible reason, according to the study: testosterone, which increases appetite for risk. “Men tend to be a bit more impulsive, less willing to admit their mistakes, and more focused on the big idea and the really high-flying investment,” says Scott Beaulier, executive director of the Manuel H. Johnson Center for Political Economy at Troy University, in Troy, Ala. Excessive risk-taking, for economists, could translate into bold predictions that have more to do with making newspaper headlines than being proven true, he says.

5. “Our measures of prosperity don’t work.”

Economists rely on many measures to gauge the health of countries, but many may not be the accurate yardsticks they’re believed to be. For example, the growth of gross domestic product — one of the measures most closely watched by economists — doesn’t necessarily indicate whether an economy is healthy or not, especially since major economic crises often occur on the heels of periods of rapid growth.

The U.S.’s own halting recovery casts some doubt on the value of GDP. Based on that measure, the Business Cycle Dating Committee of the National Bureau of Economic Research declared that the recession officially ended in June 2009.But statisticians like John Williams, editor of ShadowStats.com, a website that analyzes government economic and unemployment statistics based on methodologies used by previous U.S. administrations, argue that the U.S. economy still has not recovered. “The latest GDP figures are related to distorted inflation numbers. Since 2009, the economy has been stagnant.” Williams says that current GDP numbers with inflation stripped out would leave annualized growth about 0.4% instead of 2.4% during the first quarter of 2013. “Unfortunately the base number is meaningless,” he says. “The best that can be said for the data is that the GDP either grew or contracted for the quarter.”

Same goes for unemployment measures. According to official government estimates, unemployment was 7.6% in May, but Williams says that stat is misleading. “Discouraged workers” — those who are not actively seeking employment — are not included that estimate; adding them pushes the rate closer to 23%. “I always advise people to look beyond the headline figure,” says Jeffrey A. Frankel, a professor at the Kennedy School of Government at Harvard University, adding that the Labor Department provides stats on discouraged workers.

Still, experts say even the basic metrics have their uses — from home prices and personal consumption rates to trade balance and inflation. “GDP and unemployment are very good basic measures,” says Ball of Johns Hopkins University. “Countries with high GDP have better education and health than poorer economies.”

6. “Ours is a dismal science, but not an exact one.”

As a group, economists are nothing if not inconsistent, says Doug Short, vice president of research at the financial advisory service Advisor Perspectives in Lexington, Mass. According to The Wall Street Journal’s April 2013 survey of economists, predictions for 2013 GDP growth ranged from 1.8% to 3.9%. For 2014, they ranged from 2% to 4%, a disparity Short describes as the difference between tepid and robust growth.

The reason for the imprecision? Economists are under pressure to be more exacting than their science allows, says Lynn Reaser, chief economist for the Fermanian Business and Economic Institute at Point Loma Nazarene University in San Diego. “They are reluctant to confide in their clients that the best they can do is provide a significant range, so they pinpoint an estimate.” Economists are also too quick to change their forecasts, Reaser says: “They overreact to the latest data point, but in many cases they’d be better off taking a longer-term point of view.”

Rather than put faith in any one economist, Short advises, look at the average. And in times of financial stress, he says, “even the average forecast should be taken with a grain — or a shaker — of salt.” Economists in the April 2013 Wall Street Journal survey, for example, forecast 2.4% average growth in 2013. Meanwhile, he says, there is good news: “Hurricane Sandy is behind us, the fiscal cliff turned out to be a minor bump, and sequestration hasn’t torpedoed the economy — at least not yet.”

7. “We lean to the left.”

As of 2008, nearly half of members of the American Economic Association said they were registered Democrats, while only 17% said they were Republicans. Furthermore, in the same survey (commissioned by Scott Adams, the “Dilbert” cartoonist), 60% of the economists said that among the presidential candidates at the time, they thought Barack Obama would make the most progress on important economic issues if elected. (The survey was managed by The OSR Group, a national public opinion and marketing research company.) A similar survey of members carried out that same year of the National Bureau of Economic Research found that 46% identified themselves as Democrats and 10% as Republicans.

Those surveys, the most recent on the topic, suggest that economists skew further Democratic than most of the population—even compared to people with advanced degrees, who have long been skewered as “the liberal elite.” Among people with education beyond a bachelor’s degree, self-described Democrats had a 14 percentage point lead over Republicans among college graduates — with 39% identifying themselves as Democrats and 25% as Republicans — according to a 2012 study by Pew Research Center.

Left-leaning political views can even be seen in economists’ reports, some experts say. A 2008 article in the journal American Economist argued that economists over the past half-century have helped sell voters on bigger government. “We find that the increased role of economists in society and in policymaking has led to an increase in favorable attitudes toward government intervention,” wrote the authors, economists Scott Beaulier, William J. Boyes and William S. Mounts. (Boyes describes himself as more libertarian than right or left wing and Beaulier describes himself as a “free enterprise” economist.) Mounts did not reply to requests for comment.) Others say that only tells half the story. “A disproportionate number of academic economists favor a limited role for the government,” says Frankel, the Harvard University economist, “but you tell me whether that’s left or right.”

8. “We might have an agenda.”

Many influential economists work in academic institutions, which can confer an aura of unbiased authority. But in reality, experts say, most economists have political — and economic — motives of their own. “Most economists are paid by financial institutions that have an agenda to keep you invested long-term,” says Schmansky, the financial adviser.

What’s more, around 70% of university economists have financial interests outside of academia, according to Gerald Epstein and Jessica Carrick-Hagenbarth’s 2010 study “Financial Economists, Financial Interests and Dark Corners of the Meltdown,” which analyzed media appearances, articles in the press and research published by economists from 2005 to 2009. But in spite of these ties to business and the private sector, economists rarely identified themselves as working in the private sphere, the researchers concluded.

Economists should disclose their consulting work and universities should have clear procedures of disclosure when it comes to possible issues of ethics, Frankel says. For his part, he says he makes public any consulting work for which he earns $1,000 or more, and says economists would do well to keep track of consulting jobs. “The problem with many academic economists is that their heads are stuck in the clouds — theoretical models — and that they are unwilling to take a clear policy position, which is quite different from having an agenda,” he says. The National Association for Business Economics says economists from the organization report their affiliation when quoted in surveys or in the media.

9. “We may as well be speaking Klingon.”

In the theory of trickle-down economics, tax breaks or other economic benefits provided to the wealthy will benefit poorer members of society by improving the overall economy, but in practice, it doesn’t usually work out that way. Similarly, economic theories don’t always trickle down to the people who need them most. Among the reasons: “No one really understands what economists are saying,” Reaser says.

Of course, all professions have a tendency to speak in jargon. And when they show up in the news media, economists often try to keep the jargon to a minimum, experts say, using the most basic language to explain often very complicated concepts. And yet dumbing down economics doesn’t seem to be helping much: Despite economists’ efforts to explain their concepts through the media and through research and books, Americans have a poor understanding of even the most basic economic and financial concepts, concludes AnnaMaria Lusardi, a professor of economics and accountancy at George Washington University School of Business.

In a 2009 study, Lusardi, along with Peter Tufano, a finance professor the Harvard Business School, found that only one-third of the population understands how credit cards (and compound interest) work. What’s more, nearly half of all adults grade themselves with a C, D or F for personal finance knowledge, according to a 2013 survey by the National Foundation for Credit Counseling. This is bad news for consumers, says Gail Cunningham, spokesperson for the foundation. The lower people’s financial literacy, experts say, the more likely they are to forgo saving, incur debt and pay higher credit card fees. In fact, 57% of Americans are currently worried about their lack of savings, the NFCC survey found.

10. “We sell you what you already know.”

Do we really need economists? Some experts say that’s open to debate. Economists provide a service for banks and other institutions, but in some ways, they don’t know anything more than the average Joe. “Yet we hope nobody notices that this proposition would drive down the demand for our service,” says Frankel.

Economists’ “rational expectation hypothesis” states that workers are rational, investors are rational and consumers are rational, and that prices for assets like stocks and real estate reflect all available information, Frankel says. “People have already factored in the information that is publicly available and supplied to them by economists in terms of trying to beat the stock market,” Frankel says.

Still, the market and publicly available information are a good arbiter of how much assets are worth right only in the present moment, not of what they might be worth in the future, says Ball of Johns Hopkins University: “If you want to know what’s going to happen to the economy five years from now, economists provide a lot of judgment.”

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Yesterday, briefly, we were confused by the eruption in the stock market following a not too bad sub-200K nonfarm payrolls number. Because we know that in the New Normal bad is always good, no matter what the well-coifed TV pundit du jour tells you. Then we remembered that yesterday is when the USDA releases its monthly Supplemental Nutrition Assistance Program data, i.e. Americans on Foodstamps.

Past performance is not indicative of future results. Futures and Options trading carry a substantial risk of loss and may not be suitable for all investors. The addition of managed futures to an investor’s portfolio does not mean that the portfolio will be profitable or that it will not experience substantial drawdowns.

It was here that the ramp was perfectly explained, because while the bad (for stocks of course) data was that individual foodstamps recipients rose by 170K in March – if just a whisker below all time highs – it was the number of American households on foodstamps, which rose to a new all time high of 23,116,441 (each collecting an average of $274.30 per month) that perfectly explained the Dow Jones’ 200 point surge higher: the transfer of wealth from the poor and middle-classes to the 1% continues without a hiccup.

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(MoneyWatch) Increasing housing prices and the stock market”s posting all-time highs haven’t helped the plight most Americans. The average U.S. household has recovered only 45 percent of the wealth they lost during the recession, according to a report released yesterday from the Federal Reserve Bank of St. Louis.

Past performance is not indicative of future results. Futures and Options trading carry a substantial risk of loss and may not be suitable for all investors. The addition of managed futures to an investor’s portfolio does not mean that the portfolio will be profitable or that it will not experience substantial drawdowns.

This finding is a very different picture than one painted in a report earlier this year by the Fed that calculated Americans as a whole had regained 91 percent of their losses. The writers of the report released yesterday point out that the earlier number is based on aggregate household-net-worth data. However, this isn’t adjusted for inflation, population growth or the nature of the wealth. Further, they say much of recovery in net worth is because of the stock market, which means most of the improvement has been a boon only to wealthy families.

“Clearly, the 91 percent recovery of wealth losses portrayed by the aggregate nominal measure paints a different picture than the 45 percent recovery of wealth losses indicated by the average inflation-adjusted household measure,” the report said. “Considering the uneven recovery of wealth across households, a conclusion that the financial damage of the crisis and recession largely has been repaired is not justified,” the researchers said.

Household wealth plunged $16 trillion from the top of the real estate bubble in the third quarter of 2007 to the bottom of the bust in the first quarter of 2009. By the last three months of 2012, American households as a group had regained $14.7 trillion.

The report says almost two-thirds of the increase in aggregate household wealth is due to rising stock prices. This has disproportionately benefited the richest households: About 80 percent of stocks are held by the wealthiest 10 percent of the population.

Much of the total wealth of middle- and lower-income households is based on home values, not stocks. Even though home prices have increased nearly 11 percent in the past year, they remain about 30 percent below their peak.

While Americans continue to pay down their debt, the report says debt levels and problems with rebuilding net worth are the main reasons the recovery has been so slow. Also, the people who bore the brunt of the recession through job losses and reduced income were the ones who had borrowed the most.

The report found that members of the households that suffered the most financially were less educated, relatively young or black or Hispanic, or some combination of these factors. Those families tended to have low savings and high debt, with much of their wealth based on housing.

The poorest households have felt the sharpest losses as a consequence of the recession: “While many Americans lost wealth during the Great Recession, younger, less-educated and nonwhite families lost the greatest percentage of their wealth,” James Bullard, president of the St. Louis Fed, said in a statement. “Household deleveraging, or paying down debt, has played a key role in the recent recession and the slow recovery.”

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