Monday, June 27, 2011

Bad Financial Advice

AccountingDegree.Com recently posted "10 Financial Gurus Who've Given Terrible Advice," a short piece that nails almost all the biggies for providing the masses with advice ranging from silly (buy a commode instead of a toilet) to expensive (buy stocks! in 2001, 2007-8, etc.). Simon Constable (my co-author on The WSJ Guide to the 50 Economic Indicators That Really Matter, out since May and doing pretty darn well) and myself are not mentioned, perhaps because our book is too new but, more fundamentally, because we offer a different type of product. Instead of pretending we are gurus with special information or knowledge that we deign to share with the average American, we take the role of teachers, carefully explaining how investors can learn about the economy for themselves. Ultimately, our advice is not that investors should follow blindly the advice of purported gurus but rather that they look at and understand for themselves the cues that the economy constantly spews out. The book tries to demystify the economy in general and investing in particular, thus inoculating investors against the sometimes dumb advice of Donald Trump, Bernie Madoff, Jim Kramer, and so forth.

Obama History?

The Misery Index (MI), inflation plus unemployment, suggests that the Republican candidate, whoever he or she will be, should defeat Barack Obama in next year’s election.

Politics and the economy became so thoroughly intertwined after World War II that changes in one realm began to help predict changes in the other. Most famously, changes in MI have predicted most presidential elections since Harry Truman’s victory in 1948. When MI increases during his first term, the incumbent usually loses his bid for a second term (George H. W. Bush; Jimmy Carter) unless he is a bona fide hero (Dwight Eisenhower, the architect of the defeat of Nazi Germany; George W. Bush after 9/11 but before Iraq and Afghanistan were clearly quagmires). When MI declines, the incumbent wins re-election (Richard Nixon; Ronald Reagan; Bill Clinton), unless he was essentially appointed instead of elected. (The MI fell 3.7 points under Gerald Ford, who lost to Jimmy Carter anyway.)

Since Obama became president, official MI has increased about 50 percent, from just under 8 to over 12 because inflation increased while unemployment peaked and remained stubbornly high. Some suspect that MI has risen even faster than that because government statistics may underestimate unemployment and inflation the higher those crucial macroeconomic variables become.

Fifty important economic indicators, the subject of my new book with Wall Street Journal reporter Simon Constable, suggest that the economy will remain weak and unemployment high into the foreseeable future. Inflationary pressures are also likely to increase due to the massive monetary stimulus implemented by the Federal Reserve, which moved overnight interbank lending rates to almost zero and completed two rounds of quantitative easing (money creation). The Fed could fight inflation by increasing interest rates but in the process probably would injure employment and growth. In short, it appears highly unlikely that MI will decrease below 8 before the election next fall and it may even rise further before then.

If that prognostication proves correct and postwar election patterns hold, Obama’s main hope for re-election will be to posture himself as a war hero, the mastermind of a successful counterattack against Islamic extremists. That might be a tough sell, however, for a Nobel Peace Prize recipient.