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[qqqbear]

(Good reminders about converting profits into dollars. Earnings when ~50% of them are from foreign countries)

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The Grand Failure of the Econometric Model

February 15, 2012 (Mobile version)


If the conventional econometric model based on metrics like forward price-earnings ratios and a declining unemployment rate is so accurate, then why did it fail so completely, totally and utterly in predicting the 2008 meltdown?

A certain flavor of econometric model dominates conventional portfolio management and financial analysis. This model can be paraphrased thusly: seasonally adjusted economic data such as the unemployment rate and financially derived data such as forward earnings and price-earnings ratios are reliable guides to future economic growth and future stock prices.

Here is an excellent example of econometric analysis, which (surprise!) concludes that the Dow Jones Industrial Average is headed for 15,000 as skepticism over economic growth and rising profits diminishes. Time to Reconsider the Upside for Stocks?

As always, there are abundant charts presented to support the econometric call for steady growth in economic activity, corporate profits and stock indices.

The same approach--that standard metrics of growth are not only accurate but they're all that's needed to accurately assess risk and gain--is on display here in the house organ of bullish bias, Barrons: Enter the Bull (Dow 15K or 17K).

If this model is so accurate and reliable, why did it fail so completely in 2008 when a visibly imploding debt-bubble brought down the entire global economy and crashed stock valuations? Of the tens of thousands of fund managers and financial analysts who made their living off various iterations of this econometric model, how many correctly called the implosion in the economy and stock prices? How many articles in Barrons, BusinessWeek, The Economist or the Wall Street Journal correctly predicted the rollover of stocks and how low they would fall?

Of the tens of thousands of managers and analysts, perhaps a few dozen got it right (and that is a guess--it may have been more like a handful). In any event, the number who got it right using any econometric model was statistical noise, i.e. random flecks of accuracy

http://wallstreetexa...nometric-model/

[qqqbear]

Re: the n-body problem

What part of this decline helped, or hurt, earnings during the run-up to the 2008 debacle?

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