Pre-Galilean punditry

Most stock market commentators have learned nothing from 400 years of the history of science. That's the message I take from this piece by Anatole Kaletsky.
Underpinning it is an unspoken ideology - the notion that we should trust his (or anyone's judgment). Take this:

Many assets are still extraordinarily expensive...Most industrial commodities, for example, are still worth from 50 to 150 per cent more than they were a year ago, even though demand for them is now clearly falling and is certain to weaken further in the coming months. The same is true of many industrial shares that depend for their profits on a further acceleration of global growth which now looks improbable, to put it mildly.

This just raises the questions. Why do you know more than the people responsible for buying commodities and shares? If it's so obvious that global growth will slow, why isn't this fact already in prices?
He continues:

Many of the aggressive new funds have been hanging on to their losing investments for as long as possible in the hope that a bounce in the markets would give them a better chance to liquidate their portfolios and pay back their debts. But the very fact that so many investors will be trying to sell as soon as prices recover is likely to limit any rebound.

So why don't the fund managers see this? Why are they stupider than you, Anatole?
All Anatole is doing - and in this he's like most market commentators - is inviting us to trust his judgment rather than others'.
In this respect, market commentators are like pre-Galilean scientists.They expect people to believe things not on the basis of observable evidence, but simply because of the word of established authorities. In Galileo's time the authorities were Aristotle and the Church. In ours, they are pompous men.
But there is, as Galileo saw, an alternative. Rather than consult our judgment, we should investigate the data, ask: what moves prices? How much predictability can there be in share prices? What cognitive biases cause some people to be wrong?
Of course, these enquiries don't yield foolproof answers. But they do occasionally produce profitable insights. And of course, econometric results are unreliable. But they are (I suspect) less unreliable than judgment.
And that's the issue. The key question about stock markets is one of philosophy: how (if at all) is it possible to get useful knowledge in an uncertain world, knowledge that isn't shared by everyone?
This is why I find Kaletsky-style judgment so offensive. It takes all the interesting issues out of stock markets, to leave us with the opinion of dull old men.
Worse still, it's deeply reactionary. The notion that there's a priestly elite  with insights into the future is anti-egalitarian drivel that acts - as the Church did before Galileo - as a barrier to understanding.

Comments

[dearieme]

I did once ask you whether he's as conceited as his writing implies.

[chris]

Sorry, Dearieme, I've never met the guy.
I can vouch that Will Hutton, Hamish Mcrae and Larry Elliot are good blokes, though.

[angry economist]

I read him quite a lot and he is mostly full of doom and gloom. One of the "end of the world is nigh" brigade. His articles do stop and make me think, but what I end up thinking rarely coincides with AK's musings.

I know zip about the economics of the financial markets. I am more of a microeconomics man with a splash of macroeconomics. I get confused sometimes that people think all economists are analysing the financial markets - having relatives ask me what to invest in etc. I work for the government and so know nowt about anything as personally lucrative as that.

Having said that - I am a bit fed up with the government and fancy a bit of a change. I'd be interesting to know whether knowledge and experience as a government economist has any relevance to being an economist in a financial institution though.

I have an interesting question too - how reliable are the financial markets as a barometer of the real economy? (lets base it on data rather than the musings of various commentators)

To be honest - I don't really take financial market commentators (or most journalists for that matter) seriously in their analysis of the macro or micro economy.

[Stephen]

I would say to this guy, "Show me the money!" Show me proof that you have sold stocks and commodities short. If you haven't risked your own capital on what you say is a sure thing, why on earth should I believe what you say?

[Kay Tie]

"So why don't the fund managers see this? Why are they stupider than you, Anatole?"

Perhaps he's read your IC column and *knows* how stupid fund managers are?

K.

[head_like_a_rock]

I met Kaletsky back in the early 90s and he was pleasant enough, although 'good bloke' would be a stretch. His stuff is usually more thought-provoking than his peers but this is a very thin piece: it was pointed out to me by an equity salesman, which is not usually a great sign of intellectual rigour in an argument. I think its main purpose was to get the evocative stock market phrase "dead cat bounce" into the Times' comment pages.

Angry economist: 'I'd be interesting to know whether knowledge and experience as a government economist has any relevance to being an economist in a financial institution though'
Many have made the move and a few have prospered, but just as many get chewed up and spat out again by the VERY different requirements of the job. If you are a deep-thinker and take a non-consensus approach to the crowd, you will probably suffer, unless you are a consummate self-promoter. In fact I interviewed Chris himself many years (hopefully he won't remember): he & I instantly spotted that I was an intellectual inferior, so naturally enough a less able but more 'marketable' candidate got the job. Such is the way of the City.

[angry economist]

I guess the private sector is not so different to the public sector - politics often wins over rational evidance and analysis!

Oh I am so used to that!

[james C]

Kaletsky thinks the market is going down because his (possibly well-informed) contacts say so. The article is window dressing.

James C

[Mark T]

He has a consultancy business which is very useful for many of its insights but usually falls flat on the action recommendations. Clients are generally happy to tale the one without the other.