What makes a good economist?

 

“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must before seen. Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.” 

- Bastiat 

I love this explanation of the difference between a good and bad economist. You have to think about the longer-term or second order effects form some policy action. This is especially true when being a macro economist in finance. The Fed lowers rate which may have an immediate effect on short rates, but you have to think about how this changes expectations and impacts other markets. It is not the immediate effect bur rather the impact on expectations that matters.

Forecasts - we get it wrong - a year-end reminder

At the end of the year, Wall Street makes annual predictions. Wall Street is a prediction machine. Markets are in the prediction business through expectations embedded in prices. Yet, the judgement or value in these predictions is poor. Just look at the predictions of the stock market.  Surprisingly, the stock predictions are more conservative than reality.

For the bond markets, the futures prices are a poor forecast of future rates. During the QE period, markets expected rising rates that never occurred, and more recently, the markets were not able to predict the Fed rise in rates. Now, the forward prices are expecting strong declines. if the past is a predictor, don't bet on it.

 

Factor and price momentum across the globe

 

Many have tried to to explain away price momentum as driven by factor effects, but a recent study that looks at a large set of anomalies across a large set of countries fins that price momentum is still a key factor, see "Factor momentum versus price momentum: insights from international markets" The question answered in this paper was simple, does factor momentum drive stock price momentum? 

Now, factor momentum is strong across most international markets, but factor momentum cannot entirely explain stock and industry momentum; however, factor momentum based on principal components does a better job than traditional factor modeling. Nevertheless, price momentum often does a better job of explaining factor momentum. So, we can conclude that price momentum is distinct and cannot just be a combination of factor momentums. The paper provides an interesting display of comparisons between price and factor momentum that makes the story more compelling.

What make a historian important - perspective

The worst historian has a clearer view of the period he studies than the best of us can hope to form of that in which we live. The obscurest epoch is today. 

 - Robert Louis Stevenson 

History majors are becoming rarer at universities. Who wants to study the past? How is history going to help me with my job? I am only looking to the future. 

Yet, historians if they do their job correctly, try to make sense of what is often viewed as nonsense. The historian thinks about context. He thinks about cause and effect and what information can be found to support a set of explanatory arguments. There may be a model, but the model does not focus on the elegance of methodology but centers on the ability of explain and give some sense of order to disparate events. This is a skill which if often lacking when we are in the heat of the moment. 

The passions of the current are only tempered with time, but time is not possible when events are unfolding.

Knowledge would be fatal, it is the uncertainty that charms one. A mist makes things beautiful. - Oscar Wilde