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Beware the hidden agendas of financial 'experts'

Financial 'experts' offer many different opinions about where stocks and the economy are headed. How do you tell who's right?  The Answer Desk, by John W. Schoen.

There are a lot of differing opinions and advice from financial 'experts' about where stocks and the economy are headed. How do you tell who's right?

Though no one knows what tomorrow will bring, I am perplexed by the vast difference of opinions from well-known and experienced professionals concerning the timeframe for the economic recovery. ... I guess my question is the same as everyone’s because I want to get back into my mutual funds. But I am suspicious of the guests on the stock market shows. It seems to me they have a hidden agenda to be so optimistic. Is it even possible for you to comment on the wide difference of opinions from professionals?
-- Keith W., Address withheld

I watch the same TV guests you do, and I have the same questions about their agendas. I guess I would say that if you look closely enough, those agendas aren't all that hidden.

The financial services industry — which includes real estate agents, mortgage brokers, lenders, stock and mutual fund salesmen (aka "financial advisors") — has an enormous vested interest in restoring the confidence of people like you and me in the products they sell and the advice they provide. No matter how personable, intelligent, honest or trustworthy they may be, they are making a living selling a product.

As millions of consumers have learned the hard way, many of these products and much of the advice turned out to be seriously flawed. After losing trillions of dollars in housing wealth and retirement savings, consumers are rightly leery of stepping in to "buy on the dips" — whether it's a home selling for 30 percent less than its peak price or a stock that is touted as the “bargain of a lifetime.”

The first question to ask yourself when you listen to one of these supremely confident forecasts is how does the forecaster get paid? Some conflicts of interest are pretty clear. A car salesman is not likely to volunteer all the recalls and known defects for the model you're asking about. But you know that when you step into the showroom, and you take appropriate steps to balance the pleasant patter with your own research from independent sources.

For some reason, consumers who will dicker for the last $50 off the price of a new car don’t think twice about following the advice of a stranger on TV — or worse, turning over their life savings to a “financial adviser” based on nothing more than a magazine ad or referral from a friend. Investors turned their hard-earned retirement savings over to money managers who, on average, don’t even keep up with the return of stock market indices. Home buyers signed dozens of pages of imponderable mortgage documents based on little more than a real estate agent or mortgage broker’s soothing reassurance that home prices “never go down.”

There may be a couple of reasons for this. First, financial services professionals have done everything they can to obfuscate the process of borrowing and investing by creating a jargon-filled lexicon that puffs up their supposed expertise, overstates the complexity of what they're selling and puts their clients on the defensive. All that risk management modeling, interest-only negative amortization, asset allocation rebalancing and second derivative negative correlation analysis turned out to about as valuable as a share of bank stock.

Further, it’s still very difficult to identify the conflicts of interest that sank borrowers and investors of all shapes and sizes in the latest market collapse. When you hear a TV “expert” talking up the idea of buying stocks, for example, you’re likely hearing optimism about a decision they’ve just made about buying for their own portfolio. A money manager who has just “sold short” (betting stocks will go down) is more likely to express a bearish view. Disclosing these facts doesn’t cure the conflict of interest.

There are other sources of advice and analysis where the conflict isn't as visible. Financial economists may be honest, but their forecasts inevitably will be colored by the interests of the large banks and brokerages that issue their paychecks. An economics professor confidently calling an economic top or bottom, or the imminent demise of capitalism, may be hoping his latest book has a shot at the best-seller list.

So, whom to trust?

The urge to follow someone else’s advice remains strong, especially when the outlook is so murky. After all, if the “expert” advice turns out to be wrong, you won’t have to blame yourself.

But in the end, you have only your own judgment to rely on. When it comes to borrowing and investing, if you’re not willing to step up and act on that judgment, maybe you should hold off until you are.

"What is a 'back-to-normal' economy?" (Answer Desk, May 18) gave a good side/bad side answer that seemed to pussyfoot around the issue. I know that it was the journalistically correct thing to do, but I cannot help but think you could have done so much better by simply giving your opinion and labeling it as such. If I can say what I think, why can't you? I'm not advocating throwing the rules of good journalism out the window, I'm simply saying that the priority is to answer the question to the best of your ability within the parameters imposed by space and time.

Personally, I don't think the doom-and-gloom predictions about our economy are going to come true. ...  I also do not expect that high unemployment will linger. We are far too resilient for that to happen.
--
Fred D., Address withheld

Gee, I thought I did say what I think. To be clear, what I think is that there are several possible outcomes and — as I wrote — a lot depends on how we all respond from this point forward.

I think what you’re asking is: Which one of these outcomes do I believe is going to happen. The only honest answer (which I also wrote) is: “No one knows.” Since I have a very dim view of economic forecasting, it’s hard to see how I could offer up a forecast of my own.

To do so, I would have to know how all of the global constituents — governments, consumers, voters, bankers, investors, trade unions, CEOs, etc. — will respond to the ongoing recession. That’s beyond my capabilities. And I have yet to meet anyone who has has this gift. (Making a prediction or two that later comes true doesn't count: A broken clock is right twice a day.)

The forecast for persistently high levels of unemployment is a little easier to make. For one thing, it's happened after most modern recessions. This time, the math is pretty simple: There have been some 6 million jobs (net) destroyed by the downturn, and another million or so needed every year just to keep up with the growth of the population.

During the peak job growth of the last expansion — in 2005 and 2006, when GDP was growing about 3 percent — the economy created a little over 4 million new jobs a year. So even if this economy comes roaring back next year (which few forecasters are expecting), millions of workers will remain on the sidelines for some time.

I agree with you that technology — and human resourcefulness — have produced solutions that have surprised past generations confronted with serious economic problems. On the other hand, history shows that bad things sometimes befall societies that ignore serious imbalances for too long.

So to answer your question: What do I really think is going to happen?

I have absolutely no idea.