The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Some Things Never Change

02/05/2012

In the sixth century Before Christ, the poet and philosopher, Lao Tzu, observed “Those who have knowledge don’t predict.  Those who predict don’t have knowledge.”

So, why do economists make predictions every year?  Because the supply of predictions will rise to meet the demand for predictions.  So, why do people demand them?  Behavioral psychologists tell us there is a normal human need for “anchors,” which are used to compare other events.

For example, weathermen have notoriously bad records as forecasters.  Nonetheless, we try to listen to them every day.  We know they’re probably wrong but they usually give us some useful ballpark expectation.  The father of Keynesian economics, Lord John Maynard Keynes, once said “I’d rather be generally right than precisely wrong.”

My earlier forecast for the stock market was that 2012 would be up modestly, unless we had a financial heart attack from the European financial crisis.  With the unprecedented enactment of the LTRO (Long-Term Refinancing Operation) by the ECB, it looks like the possibility of a systemic heart attack is substantially reduced.  Indeed, I heard former FDIC Chairman Sheila Bair on Wednesday say that it was time to stop worrying about that.

Another bullish indicator is that investors have stopped buying value stocks and developed a relatively strong appetite for growth stocks.  Because market volume is so low, that will remain a weak indicator.

I remain slightly bullish for the market this year and am less worried about that financial heart attack from Europe.  Sanguine is a good word for it.

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