James Grant on Economic Forecasting

An article from nymag.com on some of James Grant's latest thinking. The seemingly permanent bear going back to the 1980's has turned pretty optimistic in the past year.

The article points out the limits of what is knowable in economic forecasting or what Grant considers a "pseudo-intellectual parlor game". Here's an excerpt from the article:

In the industrial history of the United States, there have only been about 30 economic recoveries, a minuscule sample size. (If somebody touted a medical breakthrough based on a study of 30 patients, who would rush to sign up for this new wonder drug?) As for the data itself, consider that the dominant measure of economic activity, gross domestic product, is an antique that does a poor job of capturing the intangible investments that abound in the information economy. The numbers that drive the markets up and down, like jobless figures, are glorified guesses subject to constant revision. The latest issue of Grant's Interest Rate Observer notes that annualized GDP growth for the third quarter of 1983 has been revised ten times, including just this fall! How much can we possibly know about the future if we’re still unsure about 1983?

Good to see someone in the business of economic forecasting admitting the limits of that game. Most of the investors that have served as models for my own investing have consistently reinforced the point that macroeconomics is of little use in successful equity investing.

Some examples of Charlie Munger making this point in recent years.

In 2003, Munger said this at a speech to the University of California, Santa Babara Economics Department:

My fourth criticism [of how economics is currently taught] is that there's too much emphasis on macroeconomics and not enough on microeconomics. I think this is wrong. It's like trying to master medicine without knowing anatomy and chemistry. Also, the discipline of microeconomics is a lot of fun. It helps you correctly understand macroeconomics. And it’s a perfect circus to do. In contrast, I don’t think macroeconomics people have all that much fun. For one thing they are often wrong because of extreme complexity in the system they wish to understand.

Also, at a Wesco meeting back in 2004 Charlie said:

Gigantic macroeconomic predictions are something I've never made any money on, and neither has Warren...

Finally, this past May Charlie said the following in an interview on PBS with Susie Gharib:

GHARIB: When do you see the recovery coming?

MUNGER: We don't have any special ability to make that kind of macroeconomic prediction.

Buffett has made similar comments in the past.

"We don't really worry that much about Fed policy, and actually we don't really worry that much about a recession - I hope I live to see a couple recessions." - Warren Buffett in late 2007

Deteriorating macroeconomic conditions at some point in the future should be taken as a given. Why (or why not) a businesses has long-term competitive advantages and whether it will produce durable high returns on capital is where I spend my energy.

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James Grant on Economic Forecasting
James Grant on Economic Forecasting
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