U.K. Elections Expose Stock-Market Pundits As Worthless

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In the aftermath of a wholly unexpected Tory rout in last week's elections, Great Britain's FTSE 100 Index soared 2.3 percent. Notable about the rally is that it had coattails. Across the Atlantic the Dow Jones Industrial Average rose 1.5 percent on Friday based on the assumption that U.S. voting patterns might mirror Britain's in 2016. Markets are always pricing in the future, not the past or present.

So while much ink is presently being spilled about the political implications of what took place in the U.K., less discussed have been the market and economic lessons that the Conservative Party victory gifted us with. They're not insignificant.

Consider what Michael Wolff, the great USA Today media columnist, had to say about last Thursday's voting results:

"The left-leaning BBC was wrong; the left-leaning Guardian was wrong; digitally centric Buzzfeed, trying to make inroads in Britain by targeting news to a young audience, was wrong.

The American pollster Nate Silver, famous for his 2012 U.S. polling, also got it wrong."

What about the pollsters in the U.K. who would seemingly have had a better sense of how to handicap the election? Logic dictates that some would have divined what wasn't very close, but the Wall Street Journal's Charles Forelle observed from London that "Heading into the vote, practically every major survey firm predicted a knife's-edge contest." Basically anyone who mattered failed to predict what Forelle referred to as a "blowout."

What does any of this have to with stock-market punditry? Quite a lot. Anyone who follows the broad swath of market commentary knows well that the pundits in the space are regularly predicting the "coming crash," "the next crisis," "the biggest debt bubble of all time," or as MarketWatch's eternally bearish Paul Farrell laughably headlined for his flock yesterday, "Countdown to the stock-market Crash of 2016 is ticking louder." What took place in the U.K. should have these pundits hanging their heads in shame.

It should because it's a reminder of what the great investor Ken Fisher regularly tells his clients: "Whatever bad news you think you know is already priced." Amen. Those pundits who presume to alert readers to looming market "crashes" or "booms" are working with information that is already priced. They're dealing with the known, as opposed to what isn't. If they were somehow in possession of knowledge with an exclusive quality to it, then they almost certainly wouldn't be toiling as market pundits. Readers would be wise to dismiss them.

Indeed, as the U.K. results plainly revealed yet again, markets soar and crash not due to what is already known, but based on the arrival of new information. The consensus was an electoral cliffhanger, and that's why markets soared in response to an electoral occurrence entirely at odds with what was commonly known.

More specifically, market indices don't crash or rally in percentages seen last Friday based on the seen, but thanks to surprise; or better yet, the unforeseen. If a resounding Conservative victory had long been known, the FTSE would have been flat on Friday, or perhaps even down. All this should be remembered the next time readers find themselves reading commentary about a crash or crisis in the offing, or are in conversation with a friend or colleague claiming an ability to see into the future. They can't. They're lying.

Looking deeper into the elections, many on the right in the U.S. correctly see what happened as vindication of nominally pro-growth economic policies. Their glee is reasonable. Voters want growth, so the Party that offers the policies meant to remove governmental barriers to production will generally emerge victorious.

Still, it's worth speculating on one possible reason for the disconnect between voters in the U.K. and supposedly clairvoyant pollsters & pundits. The comical falsehood that is Gross Domestic Product (GDP) may help explain why they were so wrong. To see why it should be remembered that for the longest time Keynesians such as Paul Krugman used Great Britain as evidence that government "austerity" is anti-growth. Even though governments can only spend what they've taken from the private sector first, government spending actually increases GDP. Conversely, reductions in government spending decrease GDP, thus Krugman's blind rage at "austerity" that is terrible for politicians, but great for those in the real economy. Keynesians long ago created GDP so that the horrors of government spending wouldn't be so evident. Back to reality, that government outlays add to the number amounts to double-counting of the most fraudulent kind. Figure governments have no resources, so their spending signals an extraction of resources from the private economy. If governments weren't so wasteful with the money of others, those resources would hardly lay idle as is so often assumed; rather they would be put to work in the private economy by you, me, Warren Buffett, Peter Thiel, etc.

Applying the adolescent calculation that is GDP to Great Britain, reduced government spending gave the appearance of sagging growth. Yes it did. Even though government spending reduces real economic activity for it signaling information-deficient political allocation of resources, that same spending actually makes the double-counting fraud that is GDP appear healthier than it actually is. Perhaps taken in by a number that is designed to confuse, pollsters and pundits assumed a much weaker economy than was actually the case. Voters went to the polls based on reality, while pundits, pollsters and economists made assumptions based on that which is a lie.

The above shouldn't be ignored by an understandably gleeful American right. It shouldn't because just as GDP perhaps confused the elite in the U.K., so is it presently confusing deep thinkers in the U.S. The latest GDP print was low precisely because government spending had shrunk, investment in formerly government-subsidized activity (the oil patch) had decreased substantially, and last but not least, thanks to a surge of imports (possibly the surest sign of economic health). In short, the U.S. economy is in much better shape than GDP would indicate.

Why does this matter? It matters because Republicans shouldn't get ahead of themselves. Voters don't like a negative message as the U.K. vote reveals. The GOP won't have credibility if, tricked by GDP, it talks down an economy that is improving.

The better path for the Republicans would be to acknowledge a growing economy, all the while making a strong case for how much better the economy would be if government were spending substantially less, if tax rates on income and capital were reduced a great deal, not to mention what would happen if Congress were to abide its constitutional duty and stabilize the value of the dollar.

The U.S. right shouldn't be fooled as the British left was. More to the point, the U.S. right should ignore GDP.

 

John Tamny is editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed? (Encounter Books, 2016), along with Popular Economics (Regnery, 2015).  His next book, set for release in May of 2018, is titled The End of Work (Regnery).  It chronicles the exciting explosion of remunerative jobs that don't feel at all like work.  

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