Past Experience Can Lead You Down the Wrong Path This Time
A while back I read a blog with lots of recommends that did the kind of analysis that John Mauldin describes in this question and answer:
Damien: Switching topics, can you explain why Wall Street economists tend to be permabulls or permabears?
John: Mostly because their job descriptions create agendas. There are very few like David Rosenberg who feel they have the independence they need. Also, a lot of them are traditionally trained. So, they’re trained to create tools, and they think economics is a science. It’s not. It’s an art. And quite frankly, when you treat it as an art form you have a better chance of getting the numbers right.
Damien: Can you explain what you mean by that?
John: All of the economic models are created on past performance. For instance, right now the economic idea du jour is what the recovery will look like. So, economists go back and average the eight post-war recessions and say, “Look, this is what the average was and this is how it responded.” Well, making a prediction based on that only works as well as the underlying fundamentals of the recession.
This is a deleveraging, deflationary, asset-bubble-bursting recession. We’re going to lose 8-10 million jobs. We’re back to where we were in early 2000 in terms of jobs. Over the next five years, just to keep up with population growth, we must create another nine million jobs. Plus, we’ve got another almost five million people who are underemployed. And the Census Bureau took 450,000 people off this year because they said, “They’re no longer looking for jobs, and since they’re not looking for jobs they’re not unemployed.” That is a fascinating way of looking at it! Last month you were looking for a job and now you’re so discouraged you’re not looking for a job, so we’re not going to count you as unemployed. That’s a patently silly idea!
You draw on all the experience in the world, but if you are comparing what happened in other recessions in people's memories the underlying fundaments of those recessions had nothing to do with a deflationary, asset-bubble-bursting recession.
But, people do this kind of thing all the time, make comparison of what has happened in the past without quantifying why it makes any sense at all to compare to the past.