What the Hairieriest Saroff Said

On my brother's all too infrequently updated blog, Stephen pointed out two articles that indicate why economics is called the "dismal science."

He points to a Wall Street Journal article (get it through Google news, or you just get the first 2 'graphs) titled Hindenburg Omen Flashes Dread, where an obscure mathematical formula has somewhat dubious predictive powers:

The Omen was present at every market crash since 1987, but has also occurred many other times without an ensuing significant downturn. Market analysts said only about 25% of Omen appearances have led to stock-market declines that can be considered crashes.

So this doomsday equation has predicted something like 20 of the last 5 crashes.

The problem here is not one of economics, but rather of poor journalism.

The story is not "Astonishingly accurate algorithm predicts end of the world," but rather, "Movers and shakers in financial markets spooked by bullsh%$ that is less accurate that checking chicken entrails."

The second article, also from the WSJ notes that as interest rates hit record lows, companies are making record bond issues, particularly of the junk variety.

Of course if another crash is heading in, those junk bonds will be a bad investment, though if it doesn't implode, an 8+% premium on government debt is a winner:

First Data Corp. sold $510 million of 10-year notes this week, at 9.125%, to pay down bank debt due in 2014. Peabody Energy sold $650 million of 6.5%, 10-year notes to pay off the same amount of higher-priced debt due in three years. MultiPlan Inc., a health-care cost-management provider, sold $675 million of notes this week, at 9.875%, to help fund a buyout of the company. Cott Corp., a maker of store-branded soft drinks, sold $375 million of debt at 8.125% to fund its purchase of another company, Cliffstar Corp.

But again, this is really not about economics, it's about finance, greed, and human foibles.

To the degree that economics apply to finance, it is behavioral economics that applies: In order to understand markets, one needs to understand how they are irrational, which is in the rather quixotic juxtaposition of economics and psychology.