Keeping the Elephants Away: How You Can Spot Bad Financial Analysis

01.03.2017 • Investing

By Chris Mayer – The Bill Bonner Letter (USA) –

Investors tend to rely too readily on simple cause-and-effect-type thinking.

Remember when people used to say that when quantitative easing ended, the stock market would tank? Surely you haven’t forgotten about QE? That’s when the Fed bought bonds to drive interest rates lower.

Well, if you plotted the Fed’s QE program against the S&P 500 (“the stock market”), you saw a nice, clean correlation. Ergo, it appeared that QE propped up the market. That chart got a lot of play.

But QE ended in 2014. And the market kept rolling. Here we are near all-time highs. So much for that!

Still, even today, you’ll still find some people citing how the Fed’s actions “explain” 93% or whatever of the stock market’s movements since such and such a date. They’re like Flat Earthers with fancy charts and impressive-sounding lingo. But they’re just as hidebound and wrong.

This is the old “correlation is not causation” that your statistics teacher used to tell you about.

You may remember the old joke about the man on the street corner waving a red flag. Finally, someone goes up to him and asks what he’s doing.

“I’m keeping the elephants away.”

“But there are no elephants here.”

“Then it’s working.”

Right.

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