Wednesday, June 9, 2010

Some Analyst Stupidity

I had a couple of topics I wanted to blog about recently, but haven't had much time; however, this caught my attention, and I wanted to take a bit to write about how dumb analysts are. When I say dumb, I don't mean the people are necessarily not bright or informed, but their analysis is often so off-base that you have to suspect they are either willfully ignorant or just lying for undisclosed reasons.

The article in summary discusses analysis of recent gold and commodities prices; gold is going up, and commodities are going down. One person had this to say:
“Bernanke is dispelling the argument that people are out there buying gold because of the threat of inflation,” said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. “Deflation is now more of a threat.”

Well, that's all fine and good, but it's totally wrong. Commodities are a hedge against short-term inflation, and gold is a hedge against long-term inflation. Short-term inflation might be caused by a large uptick in borrowing and lending, such as when there are ample business opportunities, people are confident about their job prospects, and/or positive about the direction of the country and its economy. Long-term inflation might be caused by a large uptick in government debt, offloading private debts onto the public by bailing out failing industries, and/or having large looming unfunded long-term public liabilities.

Wait, there's more...
“There is a great deal of uncertainty and anxiety in the financial markets right now,” Bernanke said. “Some people believe that holding gold will be a hedge against the fact that they view many other investments being risky and hard to predict at this point.”

Hm... somewhat accurate, but also misleading. When people are uncertain about investments, they buy government bonds; ever wonder why the interest rate for Treasury bills is near zero? People are very anxious about the economy and the prospects for business (you would be too if you run a business, just ask BP about life under the Sword of Damocles of nationalization, or rising health care costs and requirements, or rising taxes, or any of the other impediments Democrats love to impart on the private sector). Gold is what you buy when you think the monetary system is going to fail, not what you park short-term cash in, though. Bernanke knows this, of course, but since stability of the monetary system is his main job, it might be politically difficult to speak the whole truth here.

Anyway, thought I'd note this, as a warning to always consider the source when relying on someone's explanation of why something happened economically.

1 comment:

  1. I basically agree with this, but I can't understand how low Treasury yields supports the argument that the market anticipates inflation. If investors are confident the US won't default in nominal terms (but it might let the dollar slide), wouldn't the anticipated inflation be priced into the yield?

    The claim that "gold is what you buy when you think the monetary system is going to fail" is hyperbolic IMHO. People might be buying it because they anticipate a period of inflation similar to what the US experienced in the 70s, which was not a failure of the currency. I have almost no gold, but I do predict 70s-style inflation and agree that deflation is not a risk. I agree with tighter monetary and fiscal policy.