I don’t buy the Economist for investment tips

I view The Economist as the best magazine in the world, which is why I like to pick on them so much.  I recently came across a couple examples of faith-based reasoning at the Economist.  Here’s a piece on the recent recovery in Japan:

JAPAN’S economy has been so sickly for so long that many have stopped looking for signs of recovery. And yet, on close examination, they are there. Years of massive fiscal and monetary stimulus seem to be having some effect. Unemployment is below 3%—the lowest rate in 23 years—and wages are rising, at least for casual workers. Prices are creeping up, too, albeit by much less than the Bank of Japan’s 2% inflation target.

Yikes!  Massive fiscal stimulus?  In fact, Abenomics has involved a sharp contraction in fiscal policy, mostly due to a large increase in their national sales tax.  Budget deficits are shrinking dramatically.  Yes, fiscal policy was expansionary in the 1990s and early 2000s, but that corresponded to perhaps the worst 19 year performance in aggregate demand ever seen in a developed economy, with NGDP actually falling between 1993 and 2012.  It’s only since the beginning of 2013 that Japanese NGDP has shown signs of life:

Then I came across this headline on Bitcoin:

Manias, panics and Initial Coin Offerings

Crypto-coin mania illustrates the crazy and not-so-crazy sides of bubbles

In fact, it would be hard to find a more perfect refutation of the bubble hypothesis than Bitcoin. And yet somehow The Economist sees Bitcoin as a good example of a bubble.

Recall that back in 2012 when Bitcoin was trading at $12, the Economist was already calling it a bubble:

These curious capabilities make Bitcoins a combination of a commodity and a fiat currency (creating the coins is referred to as “mining” and they have value only because people accept them). But boosters inflated a Bitcoin bubble. Shortly after the currency launched, articles spread around the internet arguing that Bitcoins would protect wealth from hyperinflation and that early adopters would make a fortune. The dollar price of a Bitcoin currency unit climbed from a few cents in 2010 to a peak of nearly $30 in June 2011 (see chart), according to data compiled by Mt Gox, a popular online Bitcoin exchange. Inevitably, the currency then crashed back down, bottoming out at $2 in November 2011.

Inevitably?  Do the writers at The Economist have no sense of shame?  It’s bad enough that they prevented me from becoming filthy rich by purchasing bitcoin back in 2012, but after being spectacularly wrong about it being a bubble in 2012, they continue to make the same predictions over an over again, year after year.  Bitcoin could fall 99% tomorrow and the Economist would still be completely wrong about it being a bubble.  Please, I beg you, just stop trying to predict asset prices.  I don’t buy the Economist for investment tips.

As each day goes by the four anti-EMH arguments from 2009 (when I started blogging) look weaker and weaker.  NASDAQ 5000?  It just soared past 6700.  (Roughly 5000 in real terms)  Housing prices?  They’re soaring again.  Hedge funds and college endowments outperform?  Not any more.  Bitcoin is a bubble at $30?  Where can I buy some at that price.

But of course none of this will matter.  People don’t believe in fiscal stimulus and bubbles because of the facts, as the evidence strongly refutes these theories.  Rather it seems like soaring prices are a bubble, and it seems like big government spending programs should boost the economy.  Thus people will continue to believe these myths no matter how much evidence piles up against.

PS.  And it’s even worse.  When Bitcoin prices finally plunge (and they will at some point, as all highly volatile asset prices do) then the bubbleheads will think they were right all along, even as they’ve been wrong all along.

It’s hopeless.



24 Responses to “I don’t buy the Economist for investment tips”

  1. Gravatar of msgkings msgkings
    31. October 2017 at 12:18

    I think the whole ‘bubble’ debate is arguing over a vocabulary word. Is there even a mathematical definition of a ‘bubble’? Markets do get overvalued, and they do correct, sometimes in very sharp very dramatic crashes. That doesn’t mean they don’t then recover.

    So maybe what these people call ‘bubbles’ is just their word for wildly overvalued assets. Surely you agree that an asset can become overvalued at a given time? Let them have their word.

  2. Gravatar of ssumner ssumner
    31. October 2017 at 12:37

    Msgkings, A bubble call is an implied prediction that the asset is a bad investment at that price, or it’s nothing. But if true, then why would people be buying it? Sure, the price may later decline, or go up even further. Markets are unpredictable. Calling something a ‘bubble’ provides no useful information. What am I supposed to do, sell the asset? Refrain from buying it?

  3. Gravatar of ssumner ssumner
    31. October 2017 at 12:38

    I would add that bubble theories do real damage. People used the fear of bubbles as a reason not to do monetary stimulus in 2013.

  4. Gravatar of Bob Bob
    31. October 2017 at 15:38

    Bubble is not a good name for it, but cryptocurrencies have some characteristics that make them more manipulable than most other markets. This gets even worse with ICOs, which are often just downright scams, and just rely on providing poor public information.

    So instead of saying it’s a bubble, I think the right call is to say it’s like putting synthetic securities in an environment that has less regulation towards criminal behavior than the stock market did in 1870. It’s not as if the EMH didn’t apply at all back in the day, but the efficiency of said markets was nowhere near of what the stock market is today.

  5. Gravatar of Brian Donohue Brian Donohue
    31. October 2017 at 16:05

    Yes, the blithe confidence of bubbleologists is annoying. But sitting out a bull market is more annoying, and expensive.

    Let ’em chatter.

  6. Gravatar of E. Harding E. Harding
    31. October 2017 at 18:18

    Yup; Merkel’s the True Leader of the Free World:

  7. Gravatar of Benjamin Cole Benjamin Cole
    31. October 2017 at 19:46

    Well, perhaps Bitcoin can be clumped in with other categories I contend can have “bubbles.”

    Gold, art and Bitcoin share a common denominator: They are worth what someone will pay, and provide no income.

    I contend we have seen bubbles in gold. Adjusted for inflation, gold is worth less now than in 1980. Can one call a gold bubble in advance? I did not, but I was properly suspect gold was not worth any particular amount.

    Various kinds of art will see similar trends. A generation or two from now, will anyone pay $20 million for an Andy Warhol print?

    This is not the same as property, equities and bonds. The value is more tied to EMH and income.

    Bitcoin is a bit different, as it evidently allows income and transactions to be hidden. On a practical level, Paypal seems to work as well as Bitcoin. But Paypal is not hidden.

    The demand for money laundering must be immense.

    Side note: I am no friend of Paul Manafort, never met the guy. But the Feds are going after him for money-laundering.

    This says to me, the Feds can at any time choose to prosecute nearly any person of influence, or potential influence, as wealthy people all but universally engage in money laundering.

    Better not upset anybody’s apple cart in DC, if you have been money laundering. Or have a girlfriend. Have cut corners on taxes.

  8. Gravatar of Benjamin Cole Benjamin Cole
    31. October 2017 at 20:12

    Q3 total compensation, which includes wages and benefits, rose 2.5% over the past 12 months, the most since 1Q 2015.

    The PCE core is up 1.3% in September, YOY.

    Of course, compensation is not the only cost a business faces, I think usually about 50%-60%.

    Moreover, even a modest 1% annual increase in productivity would mean compensation is still pushing prices up less than 2%, even if labor were 100% of business costs.

    In short, the jibber-jabber about tight labor markets is not warranted, based on current data.

  9. Gravatar of ssumner ssumner
    1. November 2017 at 07:28

    Ben, You said:

    “Gold, art and Bitcoin share a common denominator: They are worth what someone will pay, and provide no income.”

    Yup, and don’t forget my shoes. My shoes provide no income. Shoe bubbles. Bubbles everywhere.

  10. Gravatar of Christian List Christian List
    1. November 2017 at 08:19

    @Benjamin Cole/Bob/msgkings
    Sorry but Scott’s statements about bubbles are 100% correct. How can you get it so wrong??? He explains it so well over and over again yet even here in the comment section only about 30-40% seem to agree with him. I understand why he might be frustrated, it seems to be hopeless indeed.

    Sorry Scott but you are way too lenient with The Economist here, according to you the best magazine in the world. It’s not the first time they make those mistakes, they rather make them over and over again. They call themselves “The Economist” but they don’t even get the most simple economic principles right. Why should anybody trust them regarding more complicated matters when they don’t even get the basics right?

    @E. Harding
    I assume Scott knows close to nothing about Merkel. That’s why he likes her so much. It’s all about distance, projection, and imagination. Someone like her as POTUS and we would hear one tirade about Merkel after another, and rightly so.

  11. Gravatar of Randomize Randomize
    1. November 2017 at 10:17

    Bitcoin is a funny thing in that it doesn’t actually work as a currency (deflationary currencies don’t work for any kind of inventory-based business) and it doesn’t actually have any intrinsic value. Precious metals have some intrinsic value, real estate has obvious value, and even fiat dollars have value in that the IRS only accepts dollars for tax payments.

    Bitcoins, on the other hand, don’t seem to have any value except that they become purposefully more and more expensive to create and people are willing to pay ever-increasing amounts of money for them. It makes sense that, some day, people will wake up and realize they can live their lives normally without Bitcoins and then the cryptocurrency’s value will drop to zero but I’m certainly not willing to make bets on when that day will come.

  12. Gravatar of JP Koning JP Koning
    1. November 2017 at 11:35

    “As each day goes by the four anti-EMH arguments from 2009 (when I started blogging) look weaker and weaker. ”

    What about ponzi and pyramid schemes? Many commentators said the MMM ponzi scheme that hit Africa a few years back was a bubble. And they were right. At first, people who joined it made money. But it later collapsed, at least in several countries. Why was it able to continue for so long?

  13. Gravatar of Christian List Christian List
    1. November 2017 at 12:52

    If people value something, it has value; if people do not value some­thing, it does not have value; there’s no such thing as “intrinsic value”.

  14. Gravatar of Randomize Randomize
    1. November 2017 at 14:03


    The term I should have used is “utility.” Pretty much everything has utility but it’s not clear what Bitcoin is good for.

  15. Gravatar of Christian List Christian List
    1. November 2017 at 16:25


    you found a better word and in so far I agree with you.

    But you can still say: If people find something useful, it got utility; if people don’t find something useful, it got no utility.

    Maybe you meant that Bitcoin got no other utility than being a possible currency; the hope that it might become a common medium of exchange and store of value in the future. And in so far I agree. You can’t make jewelry and electronics out of bitcoins, that’s true.

    I also don’t like that the price curve of bitcoins looks like an exponential function. What makes bitcoins so much more valuable now compared to 2013 when the price was $17? It’s not like the governments and the people in power made positive comments about bitcoins since then. The exact opposite is true. So you always have to be afraid that they will make bitcoins completely illegal. That’s hardly a good climate for investment. But yet here we are.

  16. Gravatar of Benjamin Cole Benjamin Cole
    1. November 2017 at 19:15

    Christian List and Scott Sumner:

    Yes, when the value of an “investment” is completely arbitrary –an Andy Warhol print, or Scott Sumner’s shoes (should Sumner become even more famous)—then I contend there can be a bubble.

    But what is a house, or share of Tesla worth or Treasury bon worth? Here, the market makes some sort of guess regarding future streams of income.

    The market must be pretty good at guessing, as no one seems to be able to outguess the market. I say EMH works for investments.

    Gold and Andy Warhol? In the know art houses, able to manipulate public perception and create an “aura” around some artists may be able to outperform the market. PR plays a big role.

    Gold is subject to manias. Is that a bubble? Well, getting into semantics.

    PS I read there are collectable sneakers, and some are “valuable.” Even sneakers that were not owned by Scott Sumner. I predict the sneakers will not be valuable at some point in the future.

    Some people invested in Franklin Mint doo-dads. I call that “bubble investing at the creation.”

  17. Gravatar of Benjamin Cole Benjamin Cole
    1. November 2017 at 19:24

    Interesting question: Scott Sumner and Christian List says because of EMH there are no bubbles ever in anything. Not gold, collectibles, art work,

    Ergo, Franklin Mint collectibles were a good buy when offered, just as good as an S&P 5000 ETF.

    Really, Franklin Mint collectibles?

  18. Gravatar of Ryan Avent Ryan Avent
    2. November 2017 at 06:00

    Scott, as the author of the ICO piece I encourage you to read beyond the headline…

  19. Gravatar of ssumner ssumner
    2. November 2017 at 07:43

    JP Koning, Good question. I’d say that Ponzi schemes like Madoff’s scam appeal to people who don’t believe in the EMH. Those who understand the EMH are less likely to be scammed.

    But yes, scams exist, and hence markets are not perfectly efficient in that sense. I focus on a different type of market efficiency.

    Ryan, Thanks for commenting. I should have pointed out that the article was much more nuanced than the headline, but I have a lot of problems with many of the assertions in the article as well. It concedes way too much (in my view) to the bubble proponents.

    When I write articles I am never given the opportunity to write the headline. So I won’t blame you for the headline. 🙂

    I would really like to see the Economist do a mea culpa for their awful predictions from 2012, and some real soul searching as to how they could have been so wrong. As you know, the Economist has a longstanding contempt for the EMH, as well as proponents of the EMH like Eugene Fama. I recall they once mocked him in an article. I also recall an ad for the Economist bragging that they had predicted the housing bubble, when 4 or the 5 specific predictions cited in the ad were in fact totally false. So there is a long history there, which the Economist needs to confront.

  20. Gravatar of JP Koning JP Koning
    2. November 2017 at 08:51

    “But yes, scams exist, and hence markets are not perfectly efficient in that sense. I focus on a different type of market efficiency.”

    Just for clarity, can you sketch out the two different types of market efficiency that you have in mind?

  21. Gravatar of Lorenzo from Oz Lorenzo from Oz
    2. November 2017 at 14:20

    This open letter is easily the best piece I have read on bitcoin and all the cryptos.

  22. Gravatar of ssumner ssumner
    3. November 2017 at 20:17

    JP, I’m looking at whether the price of broad asset classes such as stocks, bonds and housing are efficiently priced.

    I concede that specific assets such as Bernie Madoff’s hedge fund can be mispriced due to fraud.

    Thanks Lorenzo.

  23. Gravatar of JP Koning JP Koning
    4. November 2017 at 20:08


    Madoff’s was a fairly sophisticated scheme–you or I could have been fooled by it. What about schemes like MMM, which are obviously dubious? What possesses people to buy into these sorts of things? How come they keep popping up?

    What about lotteries? Here’s a broad asset class that is not mispriced due to fraud. What’s the deal with people paying $1.00 for a lottery ticket that’s worth fraction of a cent?

  24. Gravatar of Scott Sumner Scott Sumner
    4. November 2017 at 20:37

    JP, Lotteries are easy to explain; there is nothing irrational about gambling, and lotteries are simply gambling.

    Indeed I think lotteries are the most rational type of gambling, as they allow you to go the whole week hoping to become a millionaire, for just a dollar. That’s pretty cheap for giving depressed people a sense of hope.

    I never would have fallen for Madoff, because I believe in the EMH. He sold to people who didn’t believe in the EMH.

    I presume those who bought MMM were fools. There are lots of idiots in the world.

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