Talk about burying the lede! Last night I did a post discussing how the people who say “I told you so” after bubbles are often suffering from cognitive illusion. Only right before bed did I realize that a link in a quotation provided a perfect illustration of the phenomenon.
One of the most famous pro-bubble publications is The Economist, which likes to brag about how they predicted the housing bubble. Here is Free Exchange:
This is truly remarkable. A bubble is an unsustainable increase in prices relative to underlying fundamentals. These fundamentals are more or less observable; those who called the housing bubble did so based on historically anomalous increases in the ratio of home prices to rents and incomes. And many people did correctly identify the bubble years before it imploded, including writers at The Economist who were worrying about rapid home price increases while the American economy was still limping out of the 2001 recession. This is the reality that Mr Fama seems unwilling to confront. How unwilling?
Only when I had finished the post did I realize it provided a link to an ad for subscriptions to The Economist. Free Exchange must have thought that was a big joke, as they had just quoted Fama as follows:
I never said that. I want people to use the term in a consistent way. For example, I didn’t renew my subscription to The Economist because they use the world bubble three times on every page. Any time prices went up and down””I guess that is what they call a bubble.
Then Free Exchange made this snarky joke (something I never do):
Obviously, we are disappointed to have lost Mr Fama’s business. But I can’t say we regret the cause.
UPDATE: An Economist correspondent notes that as a die-hard believer in the Efficient Markets Hypothesis, Mr Fama is actually being quite rational in cancelling his subscription. As all publicly available information is already reflected in market prices, there’s not much point in trying to learn anything from our paper.
But the joke is on Free Exchange. The magazine ad he linked to says this:
Sep 11th 2003
From The Economist print edition
A SURVEY in The Economist in May predicted that house prices would fall by 10% in America over the next four years, and by 20-30% in Australia, Britain, Ireland, the Netherlands and Spain. Prices have since continued to rise, so have we changed our mind? . . .
Register now and receive a 14-day premium pass.
The irony here (and ironies just don’t get any richer) is that this prediction was wrong. And not just slightly off, but monumentally wrong. Biblically wrong. Or perhaps I should say Malthusianly wrong. Recall that Thomas Malthus and Paul Ehrlich are often (falsely) credited as predicting a “population bomb.” Actually they (wrongly) predicted the opposite, that the “limits of growth” would prevent Earth’s population from rising to 6 .8 billion. The Economist was not predicting that a housing bubble would occur between 2003-07, they were predicting that a housing bubble would not occur.
Think about it. In May 2003 The Economist told us that house prices were going to fall 10% over the next four years. Time to short Toll Brothers! Predictions just don’t get much more specific than that. And yet housing prices actually rose nearly 30%. How much wronger could they have been? And for this we are supposed to believe in bubbles? The housing bubble was “obvious” because The Economist predicted it?
From past experience with commenters who have a near religious faith in bubbles, I am expecting letters like the following:
“But, it’s like when Bush said ‘mission accomplished’ [another great May 2003 prediction.] He was right in the long run. Once Petraeus got the surge going in 2008 we achieved a pro-American democratic Iraq. So he was right!”
Please read my previous post before making this sort of absurd argument. Predicting prices will eventually fall is equivalent to making no prediction at all.
BTW, I notice one commenter dismissed my Economist mutual fund idea by pointing out that it is hard to short certain stocks. Actually, there are plenty that can be shorted. But even if he was right, it wouldn’t matter. If you really know the fundamentals, then there is always some stock, bond, commodity, or currency in some part of the world that is undervalued. So they could just invest in those “negative bubbles,” those areas of “irrational pessimism.” Unless you seriously think an Economist mutual fund would reliably outperform an index fund (which I think is absurd) then you don’t have a leg to stand on.
Life is good.
Update: It gets even worse. A commenter named Michael from downunder just gave me this:
The Economist definitely seems to have gotten it badly wrong for Australia, as far as I can tell. Just had a quick look at the Australian Bureau of Statistics’ housing price stats for capital cities (couldn’t find more general prices in the minute or so I spent looking).
Within the period that The Economist forecast prices would fall 20-30%, there is a single year where prices fell…and they fell 0.1%.
The largest decrease in any year from June 2003 to the present was -1.4% from June 08 to June 09, which is outside the period The Economist forecast. And prices increased 4.2% from June 09 to Sept 09…
So prices since June 2003 are currently roughly 30-40% higher here.
Wow, The Economist track record is beginning to resemble Sports Illustrated cover stories. When they say “bubble,” you should get leveraged and buy.
Update#2: I just noticed that Robin Hanson already discussed many of the points that I made in my previous post.