Anybody who knows financial markets would know that unless you really do your homework, you cannot say when there is a 'buying opportunity'. Certainly it would be wrong to say that, based on a casual application of the (economically unjustified) notion that stocks always bounce back after they go down, there was a buying opportunity back on Tuesday. That's what Stephen Harper did. Professionals who have done a lot of trades will tell that, unless you have done your homework and understand why a market is not being efficient, you won't make money betting on any simple strategy like mean reversion.
Now this post is not just about Stephen Harper. It's about commentators like Susan Riley of the Ottawa Citizen, who wrote, "...his logic is impeccable: stock markets go down, but eventually go back up", and Andrew Coyne who wrote of, "...Harper’s perfectly sensible observation that the present panic on the stock markets presents a remarkable buying opportunity ". Experience trading in the markets will tell you that, unless you figure out why somebody sold a stock down too aggressively, you don't have a better than even chance betting on it bouncing back. Right now, I'd say very few people, if any, really know exactly how bad the financial crisis is, and certainly not casual commentators who are mainly focused on Canadian politics.
Don't tell me that if you wait long enough, stocks will bounce back. If you wait, you have inflation to worry about. Look at the inflation adjusted return on stocks in the 1970's. Moreover, you can only wait until you die. In the long run we are all dead, as Keynes observed. For single stocks, consider an extreme example -- look at Lehman Brother's share price. Is it going to bounce back?
No, Stephen Harper's statement was not a sensible or logical statement that was simply insensitive. It was just wrong. As an economist, Harper should know something about market efficiency and how difficult it is to predict whether a stock price will go up or down. But I guess it was just too good an opportunity to try to express to voters his belief that the economy is probably okay.
Friday, October 10, 2008
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2 comments:
excellent point! (And definitely worth writing down). I also note the $CDN has dropped several cents against the greenback in recent days. I think whatever happens in the markets today - and interestingly also on Monday when the Canadian markets are closed for the holiday - will invariably become the deciding factor for most of the currently undecideds.
I wonder what David E. Bond would think of Harper's off the cuff utterances on economic policy, as well as his overall economic policy, and also the media over-hyping (in my opinion) Harper's thin credentials (a master's degree, and no experience as an economist). Even though I suspect he might agree with Harper's policies, a story in Bond's past may reveal why few people in the media question Harper's economic prescriptions, and do nothing but not so subtly hype his credentials.
David Bond was a chief economist with HSBC in British Columbia. He also wrote a column on economics for the Vancouver Sun (and one of the most enjoyable columns to read in that paper), often thoughtfully espousing economic liberalism.
But he had a famous feud with Gary Farrell-Collins, future B.C. finance minister in Gordon Campbell's first government that may have cost him his job at HSBC, and certainly cost him his Sun column.
Before the Liberals were elected, Farrell-Collins claimed that proposed provincial tax cuts would pay for themselves by increasing government revenue without need to cut government services. David Bond blunted claimed in his popular column that economic theory suggested that they would not pay for themselves without corresponding cuts in expenditures, and that Farrell-Collins was talking nonsense. The BC Liberals and Farrell-Collins vigorously disputed David Bond's analysis.
When after the Liberals took office their tax cuts led to Bond's predicted sizable deficit, Bond decided to revisit the issue in his Sun column, noting that the large deficit he had warned about had indeed come true, and could not help but sarcastically write his final word on the issue:
"What do I know I've just got a PHD in economics and Gary Collins is a certified flight instructor."
Shortly after this column, he was fired by the Vancouver Sun, and later left his job at HSBC. The lesson learned is that government may work together with private industry to silence respected voices which disagree with their economic utterances.
Seeing this example, I think business columnists in the corporate media, and economists in corporate life may be afraid of publically criticising Harper.
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