Printer Friendly

Wall Street economists: are they worth their salt?

Wall Street Economists: Are They Worth Their Salt?

WALL STREET ECONOMISTS: Are They Worth Their Salt? The answer is obvious. "On the one hand . . . , but on the other hand . . ." Perhaps it's not fair to begin an article about economists with an economist joke, but it is certainly in keeping with their image on the Street. A common element in discussions one has with investors is the eagerness with which jokes and disparaging remarks come to their mind. Even when speaking with the economists themselves, one senses almost an apologetic attitude. They know they're working hard at what they do, but they also know it's not always, perhaps not even often, economics that they are doing. One well-known Street economist sums it up this way: Economists and economics on Wall Street? There aren't many and there isn't much.

The problem is that two very different roles comprise the job of the Wall Street economist, and this results in some serious conflicts. Start with the fact that the economist is not a producer; he's pure overhead. At least in his role as an economist, he doesn't trade, nor sell, nor in any other way produce profits for his firm. So what good is he? One answer, increasingly obvious in recent years, is that he's a public relations man. His primary job is to burnish the image of the firm he represents, hopefully by providing forecasts and analyses that prove insightful but, in any event, by keeping himself in the limelight, which means the newspapers and television.

This function contrasts to the situation ten to fifteen years ago when the economist's "other function," producing good economic analysis, was primary. Indeed, according to Albert M. Wojnilower of First Boston Corporation, twenty-five years ago, when he was just getting started, the function of the Wall Street economist was strictly to be an internal advisor to "trading management." In those days the object was to "stay ahead of the clients -- in every respect." The point was simple: Protect each and every insight an economist came up with, and use it for the principal purpose of producing profits for his firm. In those days, an economist might have been fired if his name appeared in the newspaper, says Wojnilower.


What are the conflicts between being a good economist and being a good representative for your firm? Perhaps the most important is the self-imposed intellectual isolation. Among economists in the academic world, as well as for those in government, consultation with one's colleagues is standard operating procedure and considered essential to doing good work. Joint articles or books are commonplace, and one will often see footnotes acknowledging the help of a dozen or more colleagues. The contrast on Wall Street is striking. It seems hard to believe, but some Street economists claim not even to know the names of their competitors. There appears to be little or no contact among most of them, (1) professional or social.

The lack of any substantial professional interaction is perhaps understandable in a business where few aspire to expanding the frontiers of the science. (2) Rather, the objective is to interpret and apply the best of received doctrine and, more important yet, to convey clearly and in a timely fashion those tidbits of insight that can produce a profit (hopefully today!). In such an environment, collaboration obviously is inappropriate; the economist is being paid by one firm to produce an individual, proprietary product and must, essentially by definition, work alone.

For example, David Levine, an economist at Stanford C. Bernstein & Co., prefers to receive his intellectual stimulation from other investment professionals at his firm and from clients, rather than from the competition. In this respect, he is typical of most Wall Street economists. Consultation, or even informal get-togethers, among sell-side economists seem to be taboo. Inasmuch as they consider themselves both competent and honest, they fear that little good can come of such activities. First of all, each economist thinks it unlikely that others will be particularly helpful in advancing his understanding of the current economic environment. And, because he is an honorable person, he would not, in any event, think of appropriating someone else's viewpoint for his work. Therein lies Risk 1. You may hear of an insight or approach from someone else that you, given another day or so, might have come to on your own. Now, it is his idea, and you are inhibited from using it. Risk 2 is much simpler. Your ideas may be stolen by others with a different moral code.

When all is said and done, the overriding objecttive is to differentiate your product; to achieve that end, some economists approach their marketing in a downright presidential fashion, coining phrases and slogans to characterize their expectations for the future. Lyndon Johnson had the Great Society, but Edward Yardeni, an economist at Prudential-Bache Securities who seems to have a flair for such things, had "hat-sized bond yields" and is now talking about his "new wave economics." The origin of the "bond market vigilantes" concept is hard to pin down, but it's frequently used by Edward S. Hyman, Jr., economist at C. J. Lawrence, Morgan Grenfell, to suggest that if the Federal Reserve won't raise interest rates to curb excessive demand, bond market participants will do it for them. Few, if any, confuse their slogans with theoretical breakthroughs. This theatrical approach may tend to introduce oversimplified positions and one-dimensional economics. But it seems to be something that has to be done as part of the effort to draw attention to one's views.

Another technique for seeking attention is to produce a forecast that departs sharply from the consensus. As long as it's not perceived as totally ridiculous, it probably will get you some press, and there seems to be room in the market for a group of "intelligent extremists." One long-time fixed-income money manager suspects that some economists are merely playing to a particular audience with their consistently extreme forecasts. He feels, for example, that there will always be a constituency for a gloom and doom forecast. And many clients are certain that extreme forecasts are simply the economists' way of maximizing their own risk/reward equation -- one or two strikingly unorthodox predictions that prove accurate can make a career. Moreover, even while you are waiting, you'll find some market for your views, if only as a foil with which investors provoke their more conventional economists.

The pressure is always intense, of course, to "have a view" on whatever the current faddish interest of the marketplace may be, regardless of whether, as an economist, you consider it important, or even relevant. And, interestingly enough, many believe little risk is attached to the day-to-day forecasting game. If you're hot, you'll get favorable publicity and so will your firm. And, during those periods when you're consistently wrong, so what. You'll surely have plenty of company, and being right or wrong doesn't seem to matter. One economist knows from repeated personal experience that nobody remembers what he has been quoted as having said -- even as soon as one or two hours later, incredible as that may sound. But people do remember that you have been quoted, he says, and, after you appear in the press a few times, you become an authority figure in customers' minds.

It is not fully appreciated, however, to what extent the sales force, not the clients, may in fact be the primary constituency of the Wall Street economist. Obviously, the economist doesn't have the time to convey his thoughts directly to thousands or even to hundreds of clients. And, for its part, the sales force needs something to say every day, and therefore most communications from the firms run through that group. Moreover, the economist's output, delivered through the sales force, is more likely to generate business for the firm. After all, presumably that's what the salesman is good at. Most customers also seems to prefer this mode of communication. At least some believe that their salesperson will be able to distill the critical ingredients from the long tedious discourse that they suppose they would get form the typical economist. Yet, for all its positive aspects, the use of the sales force as intermediaries is often frustrating to the economist. His message may get garbled, the more so, the more complicated it is. So he tends to simplify his analysis, boiling it down to the lowest common denominator. This may be good technique for an educator, but it doesn't tend to produce the best economics.


Each practitioner on Wall Street has had to deal with these conflicts between the marketing and economist roles in one way or another. The differences in the approaches to the problem are interesting and very substantial. One approach, perhaps typified by Ed Hyman, is to apply your economics background simply as general training for your job, much in the way that a legal education is often viewed. Victor Chang, himself an economic consultant on Wall Street, thinks Ed Hyman may be emerging as the prototype of a new hybird: a little bit economist; a little bit portfolio manager; and a little bit trader.

At the other extreme are those who consciously try to stay within the strict confines of traditional economic analysis, leaving the trading decisions to the traders, as it were. As Robert Giordano of Goldman Sachs sees it, the economist's role is to provide "analysis and information that helps intellectualize the risk-taking process." Accurate forecasts are helpful, of course, but he would place the emphasis on providing a "framework of analysis." This approach is intended to provide perspective with which to assess the essentially random, month-to-month fluctuations in government statistics. The object is to keep the focus on the underlying trends in the economy, but that's often hard to remember in the heat of the trading wars. According to Giordano, it's the job of the economist to keep reminding the risk takers of the underlying framework. It will, he says, provide the intellectual and statistical framework that allows one to identify change quickly and accurately.

How do clients react to the Wall Street economist -- whatever his style? With skepticism. Some customers even suspect that economists tailor their forecasts to the business circumstances of their firms. (A particularly bullish outlook on the economy, for example, might tend to discourage the purchase of fixed-income securities by clients but would clearly tend to encourage the purchase of equities.) But that is an extreme view. A more common refrain from clients is that they wish to know what economists are thinking -- but only so they will know what the consensus is. The individual forecasts are viewed as so poor as to be of no use, especially as regards the month-to-month government releases.

Most economists would readily admit that a large margin of error exists in such forecasts, and few, if any, would wish to stake their reputation on them. Indeed, economic forecasting in general may have become inherently more difficult in recent years. The reason is not that the world economy has become substantially more complicated, but rather that some important government restraints on it have been eliminated. For example, we know that foreign exchange rates used to be pegged within narrow bands, held there by, in principle, unlimited amounts of intervention in the currency markets by government authorities. Also, a panoply of controls on financial instruments (which, primarily, prevented the provision of competitive interest rates and services to small depositors) were in place for many years. These artifical constraints on individual behavior provided economists with a basis for forecasting "at the limits." One could project with a fair degree of accuracy at least some of the consequences of a move of interest rates to a point where they were constrained by government mandated ceilings, or of a speculative attack on a currency. Now consumer interest rates and foreign exchange rates are free to move within much broader limits. Therefore, it is much harder than it used to be to predict where these variables may come to rest and what will be the consequences of changes in their levels on other aspects of the world economy.

Attitudes towards Wall Street economists also seem to derive in part from a view that they are just dilettantes, living off the fat of the land in recent years. After all, they have often come from mid-level positions at the Federal Reserve and yet seem to be granted instant credibility, without "paying their dues" on the Street. But with all the jokes and criticisms, it is interesting that the in-house staff, while denigrating Wall Street economists in general, tend to praise, often profusely, their own in-house economist. In some part, no doubt, this reflects the existence of personal friendships that develop on the job. But another important element is at work, namely the trust and reliance on the part of others that a good economist can build with a frequent, repetitive relationship. As we have noted, a capable economist may have to dilute his work for a general audience; or he may feel obliged to package it in an ostentatious way that turns some people off; or, he may tend to advertise his successes and minimize his failures in a way that may seem deceitful. The "internal" economist, with only the members of his own firm for an audience, need not do these things; all he has to do is be an economist.

Along the same lines, there's near unanimity among clients that the economist who trades his own account, based on his own advice, is preferred to one who does not. This may simply be a case of misery liking company; it is no fun being in the trading business when you're losing money, and there's always the risk that you will lose your nerve at just the wrong time. The "typical economist" is infamous for giving advice to be patient. ("I suppose I was just a month (quarter?) early on this one," everyman's economist seems inclined to say.) If he can give this advice while his own money is at risk, he is, for obvious reasons, respected and is more likely to be heeded. The conclusion seems to be that when economists act like economists, they can build a loyal following. When they, as so many have to, lapse into their public relations mode, they are considered only as good as their last call.


So how might we sum up the characteristics of the ideal Wall Street economist? In one sense, it's easy: He should always be right. No one would argue with the proposition that someone who could invariably forecast upcoming data releases would be the most valuable of all. The problem comes with the realization -- from both clients and the economists themselves -- that this goal is unrealistic and unattainable. Then, the question becomes, What is second best?

Certain individual characteristics appear to be timeless and essential. First, the economist has to write well. Clients value their own time very highly. The economist who can deliver his message concisely and clearly has at least made it to first base. Second, the economist has to be a good salesman. Clients seem to understand the need for salesmanship, but it shouldn't go too far. (One tells the story, perhaps apocryphal, of the bank economist who was so articulate that he was invited to sit on a variety of committees. Once on them, he was so persuasive that the committees invariably followed his advice -- which was not often very good. He finally had to be fired!) Third, and perhaps most important, the economist has to establish a reputation for intellectual honesty. All economists are loath to make unconditional forecasts and the Wall Street group is no exception. Thus, we read every day such phrases as "given our working assumption about . . ., we anticipate . . ." or "in view of the likelihood of . . ., we expect . . ." This approach is more than understandable, but, at least on Wall Street, the person who states his views boldly wins fans.

The group as a whole appears to be in a transition phase, with a role in the process of being defined. For one thing, the overall demand for economists on Wall Street seems to have peaked some time ago. (3) To Michael Prell, Director of the Division of Research and Statistics at the Federal Reserve Board in Washington, it still feels like a daily struggle to retain his best colleagues. But even Prell would agree that, since the October 1987 market crash, the flow of economists directly to Wall Street seems to have dropped off. The Street overexpanded in many areas during the heady middle years of the decade and, no doubt, also went to excees in developing its capacity for economic analysis. This overcapacity may be the reason why, according to Al Wojnilower, "many of use are not selling economics anymore, but rather a bedside manner or, put another way, thespian qualities, be they drama or comedy." This concept is probably the same that one money manager had in mind when he likened Wall Street economists to television weathermen. They don't have to be right, he says, but they have to be entertaining, and it doesn't hurt if they're good looking.

But, especially after a period when more and more MBAs with a background in economics have entered the industry, general analysis and "looking good" seem to be less important. No doublt, there will always be a role for the articulate, public relations conscious economist playing to his audience largely through the press. But this "Mr. Outside" may increasingly be teamed with a "Mr. Inside," whose job will be largely the old-fashioned one of advising the "trading management" of the firm for which he works.

Recently, many brokerage houses have been making less profits from the trading function, with investment banking being the star area. Thus, one might suspect that these firms would have less interest in specific economic forecasts than they once might have. The scope seems substantial for economists to move back towards assisting "corporate America" and away from the recent trend towards emphasizing the needs of "trading America." And, corporate America is apparently ready to listen. According to a number of economists, corporate treasurers who used to be content to make financing decisions based on "business needs" are all thinking of themselves as "liability managers" nowadays and, as such, are interested in the longer-run projections economists are particularly well-equipped to produce.

The new Administration may make things a bit easier for the group by returning to some practices of the past. If President Bush has his way, a capital gains tax will be reintroduced into our tax system. The six-month capital gains holding period provided a strong incentive to hold assets for six months -- and provided a demand for six-month forecasts. There is no reason not to think that it would do so again. for their part, amny Democrats have expressed the view that the Reagan Administration went too far in removing regulatory restraints from the U.S. economy. And, although it doens't seem to be an Administration objective, Mr. Bush may go along with the reintroduction of some of those constraints on economic variables that made economic forecasting a little easier in the past. Can it be? Heads the Wall Street economist win -- and tails they win again.

Be this as it may, one area in the past will probably prove a poor guide to the future. Repeatedly, one hears a cry from the economists' clients for more specialization. And some of the current group, both the well-known and the lss well-known, may not even realize the extent to which their success is predicated on one form of specialization or another. Ed Hyman, who has been at the top of the Institutional Investor survey of Street economists for almost a decade, is the data man; he may or may not have your confidence as regards his current interpretation of the data, but he sure can deliver it in a readable and usable fashion for you to draw your own conclusions. Richard H. Wrightson, who heads his own consulting firm bearing his name, is the Fed man. He has lots of competition, if only because so many Wall Street economists have come directly from the Federal Reserve System in recent years, but among these selling their services for cash, as opposed to commissions, his reputation shines brightly. Albert A. Gross, economist at Refco, Inc. has his "history;" he'll tell you how he interprets that history, and you may think that valuable or not; but, you'll be hard ressed to find anyone else who can tell you at a moment's notice "what the bond market did each of the last 15 times the durable goods orders data were stronger than consensus." There seems always to be a market for the true specialist, and room probably is available for many more than now ply the trade. A preeminent specialist on international economics has yet to emerge, for example, and neither has someone who professes to specialize in the ramification for U.S. economic activity of developments in the newly emerging countries.

When all is said and done, perhaps the last laugh will always belong to the economists. It seems a measure of their general acceptance and value that John Maynard Keynes' remarks of some fifty years ago are so often repeated. "The ideas of economists and political philosophers, both whe they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back." It sounds very much like the relationships between Wall Street investors and Wall Street economists.


(1) A similar academic or work history, such as, for example, the common experience of having worked in the Federal Reserve System, is an important basis for exceptions to this "rule".

(2) Lest this statement be misunderstood, I would note that, outside of academia, few, if any, such "businesses" exist.

(3) Nonetheless, the general health of the Wall Street breed stands as powerful testimony to the value of its product, particularly to institutional clients. As an avid consumer of their output, the present author can personally attest to the professional thoughtfulness and imagination of many Wall Street economists . . . in spite of the peculiar difficulties they face in producing and disseminating their work.
COPYRIGHT 1989 The National Association for Business Economists
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Henry, George B.
Publication:Business Economics
Date:Oct 1, 1989
Previous Article:The yield curve as a predictor of business cycle turning points.
Next Article:The PC corner.

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters