Tags: Ritholtz | economists | Fed | jobs

Barry Ritholtz: Economists 'Distract Investors From What's Important'

By Michelle Smith   |   Wednesday, 21 Aug 2013 08:09 AM

Investors should tune out the chatter about economic data because it's irrelevant, says Barry Ritholtz, chief executive of quantitative research firm Fusion IQ.

Ritholtz has observed the economics field for years and recently he's been spending a lot of time with economists.

The good news is that economists are intelligent, engaging and often charming folks. The bad news is their work is often of little use to investors, he wrote on his financial blog, The Big Picture.

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In fact, "the real reason that God created economists is to distract investors from what's important," Ritholtz tells Yahoo.

He uses the jobs report as an example and explained "how silly" it is for everybody to go crazy over the non-farms payroll data.

Every month 4 million people leave the job force and another 4 million enter it, he says. The jobs data is actually just reporting the net difference, which is about 150,000 jobs. Compared with the total U.S. labor pool of 150 million, that's just one-tenth of 1 percent, a mere fraction, he explains.

And the data is never accurate when it's released anyway, he adds. It gets revised and bench-marked multiple times and the final number looks nothing like initial figure people go "crazy" over.

If your timeline is the next 90 seconds, it's important, he told the Daily Ticker. Otherwise, "it's a meaningless data point."

"All we care about are the long-term trends: is the economy creating jobs? Are wages going up or are wages flat? What does this mean relative to inflation?" he notes.

A problem with economists is they are loathe to admit "they don't know." And that includes the professionals working at the Federal Reserve, Ritholtz claims.

"Whenever I see a forecast written out to two decimal places, I cannot help but wonder if there is a misunderstanding of the limitations of the data, and an illusion of precision," he writes.

Ritholtz assumes this is because the modeling issue, stating that models are of limited utility and it's best not to become over-reliant, which is a mistake the Fed continues to make.

"Several analysts have told me that if the Fed cannot model something, then to the Fed, it does not exist. Think about the absurdity of that view — and its impact on policy," Ritholtz argues.

He tells Yahoo that models didn't help the Fed recognize the financial crisis.

He thinks the Fed is doing the best they can do now, but it's still pretty much a guessing game.

"This is an unprecedented situation," Ritholtz states. "They don't have a cooperative Congress. They're in uncharted waters."

The Fed is "kind of winging it," he says.

"They're flinging stuff against the barn wall to see what sticks," he adds.

"Eventually, time will heal all this, but it's going to take a while to get there."

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