Tuesday, August 18, 2009

"Your crystal ball ain't so crystal clear"

One can't help but notice that despite irrational market swings, panicked investors speculating wildly on futures, good news being offset by bad news week by week; we are still seeing a plethora of "experts" trying to predict the future. It has been said that economics is extremely useful as a form of employment for economists, and that an economist is an expert who will know tomorrow why what he predicted yesterday did not happen today. After dropping over 40 grand on my own degree in Mathematical Economics, I often find myself wishing that I could take a mulligan.

Recently I have been having frequent chats with a co-worker who is nearing retirement and he is trying to write a computer program to trade foreign currencies with the intention of becoming a millionaire. I don't want to discourage him because he seems completely convinced that he will be successful, as he is a skilled computer programmer. But honestly, the idea of making a large return in a relatively short period of time buying and selling currencies is highly unlikely. There are days when I will talk to him and he'll be flabbergasted by the failure of his program to turn a profit. That's when I say that he is assuming this segment of the market behaves in a predictable pattern. He does not research cause and effect, and how the thousands of variables which affect price trends behave in relationship to currency values. He only looks at the scoreboard, and uses someone else's system to determine the best time to buy and the best time to sell.

My warning to anyone listening to "forecasts" is beware of the long term predictions. Investment advice based on short term probability is far more trustworthy than long term projections. There are a slew of potential outcomes, each with its own probability of occurring, and those probabilities are constantly shifting when new information is absorbed into reality. When these wanna-be Nostradamuses make a forecast, it becomes obsolete very quickly, to the point where I question the wisdom of trying to gaze into such an uncertain future. I have a fondness for the sage-like words of the wise prophets known as the Beastie Boys "because your crystal ball ain't so crystal clear. Oh my God it's a mirage, I'm telling ya'll it's sabotage!"

I would be really happy if indeed the worst of this so-called “Great Recession” is over. In the United States, if conditions get worse it increases the probability of Republicans winning in 2010. In Canada, if conditions improve it increases the probability that Conservatives win the next election. It does present a conflict of interest.

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