Now that the Fed has initiated its process of policy adjustment, market timers are out in force with dire warnings, ranging from collapsing real estate markets, a bloodbath in high-yielding assets, soaring gold prices and an imminent recession of the American economy.
What are we to make of all this? Well, in the best of cases, the buy-sell timing calls are a complex guesswork based on observations of excessive supply-demand imbalances affecting large segments of the real economy and financial services.
So, before dismissing out of hand any of these headline-grabbing pronouncements, I believe that investors might wish to look carefully at the assumptions underlying such forecasts. It is simply a question of asking "why."
Remember that some of the people who got the last financial crisis right were those who correctly observed hugely destabilizing market imbalances and practices that were bound to undermine the soundness of the U.S. – and even global – financial system. A few of these market timers eventually ended up with a glowing reputation (and probably a lot of money) for their insights and analysis.
Don't forget the past
And let me give them even more credit that might infuriate my fellow economists. Indeed, it is even possible that some of these market timers perfectly understood the key economic and regulatory drivers that inexorably led the American economy to the financial precipice.
Then, as now, the Fed's policy was at the center of it all, simply because long years of loose monetary policies tend to lead to an equally loose credit-risk analysis.