It's axiomatic that in investing, the consensus is always wrong -- so you should bet against it. But when it comes to today’s crazy economy, it's not easy to tell what the consensus even is. From what I can see, it's all over the lot.
My friend Scott Grannis, one of the most acute economic observers I know, is absolutely convinced that the economy is in a booming V-shaped recovery. Every time some new piece of data comes in, he charts it and writes about it on his blog, citing it as more evidence for his V.
For example, when this week's Institute of Supply Management manufacturing index came out, he wrote a post "ISM index another V-sign." Grannis said:
On the whole other side is David Rosenberg, the former Merrill Lynch economist now perched at Canada's Gluskin Sheff. He's so negative he sees no recovery at all, V-shaped or otherwise. He said last week that "we currently have a situation that is not consistent with a plain-vanilla recession but with a depression." So when he saw this week's ISM data that Grannis thought was so positive, Rosenberg said:
So there's no consensus, only an average. Take Grannis's exuberance and Rosenberg's bleakness and average them together, and what do you get -- something in between, something that looks like a sluggish recovery.
Victor Zarnowitz, a great economist who contributed mightily to our understanding of business cycles -- and who tragically passed away this year -- determined that the average economic forecast tended to be late in boom times, and early in bad times. In other words, during business expansions, most economists don't correctly foresee the end of the cycle and the coming of recession. They are too optimistic for too long. On the other hand, he found that economists tend to be a little early in predicting the end of recessions -- again, they are too optimistic.
So maybe this tilts the playing field a bit toward Rosenberg and away from Grannis. Rosenberg may be going overboard in his pessimism, but he may at least be right in thinking that people like Grannis are jumping the gun.
But on the other hand, Zarnowitz has something else to teach us that may help Grannis's case. What has become known as the "Zarnowitz rule" is that economic recoveries, following very sharp recessions, are usually especially vigorous. The harder the fall, the harder they bounce back. In that sense, Grannis has history on his side. You might even say that for him to be wrong, you'd have to dare to utter the four most expensive words on Wall Street: "This time it's different."
Trackback URL for this story: http://www.smartmoney.com/tb/Jdms8dE.3D
What is a Trackback?It is a way to tell us that you have published something that references this story.
How do I send a Trackback? If you blog or mention this story on your website, you can use this Trackback URL to notify us about it. Some blogging software programs can help in sending a Trackback to us.
Click here to read more about Trackbacks.
RT @SmartMoney: The Consensus Is...No Consensus http://bit.ly/8Qb2ks
Read Full Article »