March 20, 2013

In defense of Zerohedge

(Not that they need defending.)

Since its launch in 2009 Zerohedge (a non-mainstream financial site) has been very bearish. The site (as well as many other sites) tends to focus on what is wrong with the economy, markets and financial system. I tend to agree with many of their analytical conclusions and value their insight.

Many critics, however, believe that the site has sent investors down the wrong path. They point to the market performance since the site's launch - markets have roughly doubled while Zerohedge has talked down every aspect of the economy and financial system. Has Zerohedge been wrong this entire time? 


This raises the biggest problem with finance and economics. Everyone is looking for THE answer as if the world is some algebraic problem waiting to be solved. It is not so simple.

In economics and finance there are multiple realities. Zerohedge can be both right AND wrong at the same time.

Timing

It is better to be a year early than a minute late. There are many people who saw the impending housing doom starting in 2006. So were these people right or wrong? Considering markets performed well for one to two years after these people raised the alarm many at the time argued they were dead wrong. It was not until late 2008 that their forecasts came true and they were proven right.

My point is that Zerohedge's view of the world may not have the same time horizon as its critics. Measuring success of a ten year view over three years makes no sense and is unfair. It is like declaring the winner of a Nascar race after three laps.

In this respect, Zerohedge's critics should understand how far into the future its authors are looking before checking the 'wrong' box. 

Timing II

Here's the other tricky thing with timing. The world is a dynamic place with an infinite number of variables. Nobody can predict all the minor and major events that occur daily. Consequently, nobody can accurately forecast the changes in these variables over long periods of time. As a result, a forecast - or any analysis for that matter - is only relevant the moment it is created. As soon as an analysis hits the air it has already begun to lose validity because the world constantly moves. So to hold someone to a forecast or analysis is to also assume that the conditions under which that forecast or analysis was made still exist.

Prism

How you view the world depends on the prism you use to view it. To someone who is living on the streets the world is a hellhole. To the successful entrepreneur it is opportunity waiting to get tapped.
Which person is right? I would say both.

It appears to me that Zerohedge is viewing the world through a prism that displays the follies and failings of the market system. Sensationalism aside, they have not really been making time-based asset forecasts. Instead they have pointed to the gaping holes in the current system. Given this prism, I think it is hard for anyone to disagree with Zerohedge's interpretation of the world.

Application Fallacy

One other point I'd like to mention is that there is a difference between economics, social science and investment finance. The topics are closely related but not necessarily correlated. So a highly negative prognosis for one could occur while another is thriving. 

In other words, the economy could be in the toilet while the markets shoot for the stars. In contrast, investor sentiment could be at lofty highs only for markets to tank. 

I would argue that Zerohedge's position has been right. But unfortunately many readers interpret Zerohedge's analytical skepticism as a reason to short the market. While an analysis of one of these factors will impact the analysis of another, conclusions about one cannot necessarily be drawn from the other. Zerohedge's value to its readers has been to highlight the issues faced by the system. It has never really promoted itself as an asset allocation service, and investors applying Zerohedge's analysis in such a way have operated under a false premise.

In conclusion, I would say that Zerohedge provides a very useful service. However, to benefit most from its view of the world, one must first understand what the website is not.