Economists

I always get a kick out of clients or friends who say thing like, “I hear that interest rates are heading lower,” or some other such prognostication. I suppose that this is due largely to the human need to find validation for our beliefs. I detect wishful thinking here too; people seldom talk about rates heading higher. It’s human nature to want to hear encouraging news.

But given the number of economists in the world, if you found a large number who held that opinion, at any particular point in time I suspect that it would be possible to find just as many who have held contrary opinions.  And all of them would have charts and tons of data to support their conclusions. I suppose that is why I find this cartoon so funny.

 

It seems to me that the purpose of studying physics, astronomy, history or economics is not just that you can understand the past and present, but you can possibly get insight into the future.  We all know what the stock market did yesterday, last week, and last month. We know that it is possible to say things like, “It formed a head-and-shoulders chart.”  But if that does not help you make good decisions today about the future, what good does it serve?

It’s is always a lot more useful to hear the doctor’s diagnosis, suggested treatment, and a prognosis for recovery than to read the coroner’s report. 

Bottom line: There are hundreds of economists in the country, perhaps thousands, and I wonder why so few, other than Yale’s Robert J. Schiller, accurately predicted the crash that ended the dot com boom. He even came back for a curtain call and accurately predicted the end of the housing bubble that was the fuel that fed the proximate financial maelstrom we are now in. Name another who did so?

When you read much useless stuff written by economists, you can understand why Nassim Nicolas Taleb in his captivatingly wonderful book The Black Swan suggested that the King of Sweden eliminate the Nobel Prize for Economics. 

I am not suggesting here that you not try to understand the economic world in which we live, especially if you are in the market for a mortgage. You should, but stick to looking at the facts. I find a useful tool is to track the yield on the 10-Year Treasury Security. Movements in this index correlate with changes in mortgage rates. This is widely available, but a good graphic way of presenting the data can be found at Yahoo.com. Click on “Finance” and in the box next to GET QUOTES, type in ^TNX.  Bookmark the page for future reference during the process of getting your loan.   

Finally, if you feel really brave, you ought to prove to yourself how hard forecasting really is. Trace today’s chart for any period — say, the last three months. Then take another piece of paper and draw your own forecast for a similar period. Then go back every day or so and plug in the real numbers on your chart for the next three months. You will end up with two lines; one is your forecast and the other is reality.  I’d love to hear your story when you are ready to share it.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower
articles, Randy is a mortgage broker who has financed over $1 billion
in properties. He writes about home buying and real estate finance
topics for CreditBloggers.com.

Tagged as: 10-year treasury security, economic forecast, economists, interest rates, peter schiff, robert j. schiller, robert schiller, stock market, the black swan, TNX, yahoo finance

Randy Johnson Randy is a Credit.com contributor and seasoned mortgage expert. He writes about home buying, mortgage laws and real estate finance issues. He has financed over $1 billion in properties, is the author of How to Save Thousands of Dollars on your Home Mortgage and he is a feature columnist for Savvy Borrower.