Economist Says We Can’t Make Accurate Market Predictions

Beefs and Beliefs

Policy is one of the biggest market distortions because it causes uncertainty.

Published on: February 7, 2013
 

Today I heard an ag economist say a profound thing: he said the world is too complex to make accurate market predictions.

Michael Swanson, who studies agricultural economics for Wells Fargo banking system, said this:

“We can’t see the future. It’s not because we’re ignorant. It’s because we can’t see what’s really happening.”

Then he added, “Everything is connected. We just can’t see how.”

Swanson, who was speaking at the National Cattlemen’s Beef Association meeting in Tampa, Florida, said the interrelationships between commodities and their markets are myriad. He calls these relationships “feedback loops.” A few examples are the feedback loops between pricing for corn and cattle, cattle and corn, ethanol and corn, crude oil and corn, natural gas and crude oil, dollars and other currencies. As each one affects another, so that affects many others.

Worse yet, some of the biggest problems in markets are from the uncertainty caused by policies, Swanson continued.

“Policy depends on people and people are unpredictable,” he said.

I would add to that the fact we almost never see all the effects of market manipulations created by governments.

Swanson said the recent and current machinations of the Federal Reserve Board on money and interest rates create that type scenario. It is providing no value and will likely prove itself a negative on agriculture in the long run.

He says the Fed’s large amounts of money and low interest rates have not increased investment as the economists who run the Fed believe it should. Instead, it has only resulted in further “churning” of existing investments and markets.

Swanson says the Fed’s policy results from its collective belief system, just as all policies are the result of belief systems of those who create the policies. In the case of the Fed, Swanson adds, it is measuring the health of the entire economy by gross domestic product (GDP).

GDP is an extremely compressed view of something that large, he says. In fact, it is so compressed it’s quite likely wrong. Perhaps worse, it may be high one time and low the next. It may be creating noise and not accurately measuring trends. Regardless, it is the yardstick the Fed believes in.

Then Swanson added another interesting tidbit. He said he believes the Fed’s monetary policies are specifically aimed the housing market. He thinks the Fed believes it can re-inflate the value of U.S. housing so people can get out of their mortgages.

I’m not sure the Fed is that delusional but I am sure it will have consequences neither they nor I nor you are smart enough to see.

Once again I wish all these policymakers would just stop it. Using hindsight, I can’t find any examples where they didn’t break things worse with their repair work.