January 31, 2005
Kid: Homer, can you tell me what's going
to happen this year in the stock market?
Homer: No, but I can
certainly make an educated guess.
Kid: Great! Let's start with the economy. How's it doing,
where we going, and generally what's going to happen.
Homer: Sit down kid, this is
going take awhile. You know of course that any guess on what the
economy or markets, the stock or bond markets, are going to do,
is strictly a speculation. In other wards Kid, no one, and I
mean no one, can actually predict what will happen. Are we clear
on that?
Kid: Yes sir. But I don't understand how all these people
can make all these predictions. Why I read a whole section in
the Wall Street Journal a
couple of weeks back on what was going to happen and what
companies would be strong and what to buy, what to avoid, and
where the economy was going to go. It was all based on these
experts.
Homer: Those experts
are offering nothing but pure speculation Kid, pure speculation.
None of them have a clue, only 'hunches'. If they 'hunch' right,
they brag about it for the entire next year while they are
getting ready to 'hunch' again. If the next 'hunch' fails, well,
they just wait till the next year and hope they get lucky again.
What I am trying to tell you Kid is your guesses are as good as
theirs if you can get your hands on the same information they
have.
Kid: What information is that Homer?
Homer: The facts kid, the
facts. Let's start with the basics. Gross Domestic Product, the
economic measuring tool that tells us how we are doing made a
substantial improvement from the previous year. The GDP grew by
over 4% last year versus somewhere in the 3% range the year
before. Unemployment was down, retails sales where robust, new
home construction, resale of existing homes, new business
startups, new public offerings, the stock market, and literally
everything else was up measurably in 2004 versus 2003. This is
one of the reasons the Democrats could not get "the economy is
terrible label" to stick on the Republicans during the national
election in November. Interest rates on mortgages remain low and
inflation across the board was held in check. These are the
facts Kid. From that we can begin
Kid: So is what you are saying that from all these
statistics you can predict what will happen?
Homer: I never said predict
Kid, I said guess. The fancy word for economic guessing is
"prognosticate".
Kid: Prognosticate?
Homer: Yea Kid, to guess the
future!
Kid: Well Homer, give me your best guesses.
Homer: Fire away. What do
you want me to prognosticate?
Kid: What's the stock market going to do?
Homer: Go up a 1000 points,
maybe more
Kid: No kidding?
Homer: No kidding. How much
depends on a continuing positive outcome of the war in Iraq, how
well we deal with the budget deficit, and whether or not we can
privatize social security. In addition the unemployment rate
must continue to drop and the economy must sustain the current
growth in GDP in 2005 that will clearly mirror our robust
consumer confidence. We do this and the market goes up.
Kid: It sounds to me like there are too many ifs, and
not enough real stuff.
Homer: But that is real
stuff kid. We can predict what might happen given the scenarios
currently in play and they continue to bode well for the economy
and the stock market. If they don't, it is because of factors or
unknowns we did no take into consideration. It's like trying to
find validation for a recession Kid. Nobody can accurately
predict a recession. We can guess there might be one but it is
not validated until we are actually in it.
Kid: So all these guys are doing nothing but guessing,
even the Wall Street Journal..
Holy-Camolies, these guys are doing nothing but guessing and we
are making decisions based on their guesses?
Homer: If the truth be
known. Yep!
Kid: Stung again.
Homer: Not really, you
should just know better. The best odds these guys, and me for
that matter, got going for us is that we can be right 50% of the
time. Those are pretty good odds and if I can get you to believe
me and believe I can draw on the facts as I see them to make a
credible "prognostication" and I am right? Well, you think, and
a lot of other people think, I am the smartest thing since the
invention of the wheel.
Kid: So what are we to do Homer? If none of these guys
really know, why do we pay them so much money to predict what
they can only be right 50% of the time on?
Homer: Simple answer to that
one Kid. Some of us are better at it than others. We can just
sense when a market is healthy and when it is sick. We don't
always get it right, but on the whole, we are more right than
wrong. Put another way Kid, somebody can flip a coin 10 times,
call heads every time and expect it to come up at least 50% of
the time. But it may never comes up. That is the way it is with
some who like to think they can predict the market. And you know
what Kid?
Kid: What Homer?
Homer: Most of those people
are the pundits, the ones who think they know what is going to
happen but could not even predict it even if they really knew
the answers.
Kid: So can I make money following your advise?
Homer: Sure, 50% of the
time!
