Its Philosophy Friday, and I want to discuss in broad terms the same interesting conversation that keeps coming up:

Over the past few weeks, I keep getting that question: Whats your forecast for the economy? Where will interest rates be at the end of the year? Are Jobs going to improve?

And of course, the big one: Are you bullish or bearish?

Most of the time, I give a two part answer that goes something like this:

1) I have no idea or real opinion on that, but here are some risk factors;

and

2) What I find more interesting than forecasts is trying to discern what consensus is, and then war-gaming what scenarios the Street is least prepared for. What outcomes cause the greatest disruption? What are the major portfolios least positioned to handle?

That often leads to an interesting discussion, and allows me to avoid saying what I really want to say, but often don’t. It goes something like this:

“Before anyone at this table gives us their NEW forecast, I must request, and indeed insist upon, in the spirit of full disclosure and objective accuracy, on the following 2 data points:

1. What was your forecast last year at this time on the same subjects?

2. What is your overall forecasting track record over the course of your career? Prior to the 2008-09 Crisis? Since then?

I have on occasion brought that up, and it causes a delightfully uncomfortable squirming, for all the right reasons.  (That’s the fast track to — heh heh — not get invited back to many dinners).

The thing I find most fascinating about the disclosure demand is what it does to the most confident (i.e., over-confident) forecasters. Humans, as I have pointed out many times, love a confident precise forecast over an accurate ambiguous one. Regardless of the obvious fact that most forecasts are bullshit, the track record disclosure does some lovely things.

A. It completely wilts the cocksuredness of most forecasters;

B. It provides a context for the forecast itself, namely, that they are mostly worthless;

C. It forces the participants to admit, both to themselves and others, that they actually have no idea what the future holds.

The next time you are in a group and some of the assembled people start making forecasts, ask the two track record questions above. Watch the stammering and rationalizing of the past performance, and the change in attitude. It is great fun!

Here’s my forecast: If you do this, you should not expect to get invited back many dinner parties in the future . . .

 

 

 

 

 

Previously:

The Folly of Forecasting, (The Street.com, 06/07/05)

Worst Predictions for 2008 (December 31st, 2008)

Inside the Paradox of Forecasting (January 11th, 2011)

Forecasts Are Not Analysis; They are opinion (May 7th, 2013)

What’s your outlook on the markets and the economy?” (June 18th, 2013)

The Narrative Fails (Washington Post, July 19th, 2013)

Curse of the Narrative: Everybody Loves A Good Story (August 3rd, 2013)

Category: Apprenticed Investor, Philosophy, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “Whats Your Forecast?”

  1. TapeReader says:

    There is an evolution of forecasting to nowcasting.

    Nowcasting uses social media data as its source.

    This field of data mining is particularly viable when gathering consumer based information such as New Home Sales, Jobless Claims, Retail Sales, etc., as consumers now blather on about everything that they do using any web medium possible.

    Hence, smart algorithms can harvest lots of real-time forecasting, oops, I meant, ‘nowcasting’ data that was previously unavailable.

    For instance, we surfaced nowcasts for 15 economic reports during September (ISM Manufacturing Index, Construction Spending, Motor Vehicles Sales, Jobless Claims (4 reports 1\week), ISM Non-Manufacturing Index, Nonfarm Payrolls, Retail Sales, Housing Starts, Existing Home Sales, Durable Goods Sales, & New Home Sales)with incredible accuracy – and consistently beating the Economic Consensus with regards to misses or beat of the Actual vs. the Prior.

    For instance, on 19-SEP, our nowcast came it within a 0.35% difference from the Actual, vs the Consensus which was off by 4.72%. Furthermore, the Consensus Range, which is an amalgamation of 58 economist polled by Bloomberg (presumably these economists are the creme de la creme of the economic forecasting world) is that the entire range of the Consensus (5.1 M to 5.4M) was outside of the Actual number of 5.48 M.

    That’s a pretty incredible statistic…

    http://earlyannouncement.com/

    We will be surfacing Nowcasts for October over the next week or so….it is pretty interesting to track how this new methodology trumps the current approach of calling up a bunch of economists and taking their pulses.

  2. Derektheunder says:

    I will do that next time I’m in a dinner and I decide I’d rather not get invited back!

  3. [...] "Humans love a confident, precise forecast over an accurate ambiguous one."  (TBP) [...]

  4. Doubtful says:

    If you really want to see people squirm ask about
    how much money they made last year based on their
    forecasts and where one can find their public record.
    It could even be a model portfolio without any real
    money involved as long as it can be verified.

  5. ByteMe says:

    Another question you want to ask: how much of their own money have they made or lost following their own forecasts? What? They didn’t risk their own money on their BS forecast??

    But there are some general answers to the questions:

    What’s your forecast for the economy?
    We one or two screw-ups away from a complete disaster. The same thing could be said for my driving.

    We’re not one or two successes away from a huge bull run.

    Where will interest rates be at the end of the year?
    Somewhere near where it is now.

    Are Jobs going to improve?
    Not most people’s, no. The average person will continue to hate their job, while some of us will continue to love our job.

    I could have also said “There’s nothing we can do for Steve Jobs now”, but that would be silly.

    Are you bullish or bearish?
    Depends on the drugs I take that day. Generally, I’m bullish on my money, but bearish on my politicians’ wisdom.

  6. Herman Frank says:

    Sorry, “I don’t care about your forecast!” So, Honey, let’s say goodbye to these good people and go home! We’ve got an investment plan for 5+ years, which is intended to protect principal and make sure that we can afford to send junior to school. As my good mentor used to say “Doing that, I don’t drink a single Scotch less!”

    Too many variables at play, too much posing and brouhaha to be taking anything of it serious. Don’t care about the stories of “beating the market”, the tail-risk will wipe them out. Don’t care about the glitter. I wan’t to add more to principal in the good years, and less in the bad years.

    What did I do? I went cash before the crisis, kept principal, and went back in. Ask me in 10 years how I did in the market of 2012 – 2022.

  7. howardoark says:

    No one knows, but since you can’t win if you don’t bet, I’ve bet that I’ll have the opportunity to buy S&P500 stocks at a substantial discount to today’s price at some point in the future on the inevitable road to Dow 36,000. If I’m wrong, my earned income will likely be enough to see me to a comfortable retirement and if I’m right, my unearned income, relative to my peers, should get me there regardless of the vicissitudes of the labor market.

  8. Chief Tomahawk says:

    Genius!

  9. gremlin says:

    “Humans love a confident, precise forecast over an accurate ambiguous one.” is true for other endeavors besides investing. Especially when dealing with Driver type personalities: ‘don’t tell me the odds, can you do it or not?’ The terrible thing is that it feels better to say “yes, I can do it” even knowing the real risks and uncertainties. How much of our problems are caused by that tendency to take the leap with imperfect knowledge, especially when it’s other people’s money at risk.

  10. cbatchelor says:

    I certainly agree with the overall point, but when you’re dealing with real money running a business or investing (vs writing a column or running a political campaign–I’ve done it all), you’ve got to have SOME kind of vision about what is next. Even if you (like me) are very diversified, there is a range within that where you likely make some kind of forecast.

    The people who make money in investing are those who have the courage to put their money down when they think in sounds like a duck, smells like a duck and looks like a duck to them, but others say no or are uncertain. Of course, you probably need to know something about ducks. (This might be the most obvious post ever made here, but what the heck.)

    BR often publishes charts that look at the long term and I think that is wise and useful. But, while many of the basics are the same, there are a few things “different now,” where “now” is the last 35 years or so. The pace of change–social, political, economic, technical–we have seen over that period is, I argue, unprecedented. It’s breathtaking. It’s a wonder that we humans are coping as well as we are. I think this is was is driving the crazy Tea Party types to the streets with their funny hats and to the polls. If they made their slogan, “What? Hold on! Wait a freaking minute, will ya?! What?” I think many more would join them. Which, of course, makes BR’s point here all the more valid. And it’s also why people are not going to stop asking him, and themselves, those questions.

  11. [...] Your market forecasting record sucks. Just stop already.  (Big Picture) [...]

  12. pc says:

    I think the effects of Obamacare is going to boost the economy by mid next year. Many healthy baby boomers in the 55-65 age bracket keep working until 65 just so they don’t have to shell out $1000 per month for private health insurance. The new health insurance rates under Obamacare should be less than $500 per month and once these people stop working and no longer have any income their health insurance costs drop to $200-300/mon because of the tax subsidy. We’re going to see an increasing number of people who tell their employers to “take this job and shove it up #@$%…” and start enjoying their Golden years. These are the people with money in the bank and equity in their homes. This population is large enough to make a difference in our economy. As these people vacate their high paying jobs it opens up new opportunities for the younger generation who now will have more purchasing power to buy homes, new cars, etc. This is how the next economic boom will start.

  13. slowkarma says:

    I don’t think it’s possible at the moment to forecasts the markets, although it’d be nice if it were. That’s because instead of being able to use traditional indicators, the markets are now moved by one man (Bernacke) and his thoughts, and how do you predict those? All summer, most people expected tapering to begin in September, but those people were wrong. But how do you explain why or how they were wrong? Now that Larry Summers has dropped out as a candidate to run the fed, it seems that the most likely appointee will be a Bernacke clone, who’d run the place with the same mysterious psychology as Bernacke. (Which, of course, is why the hedge fund people are pissed — Summers would probably have been somewhat more predictable in his inclinations.)

    I don’t know if I’d call this a forecast, but my *feelings* are: the market wants to fall, but can’t as long as the Fed keeps pumping the money in. How long will this go on? Well, I wouldn’t be surprised if it came to a sudden end in March of 2017, shortly after Marco Rubio’s inauguration…

  14. mpetrosian says:

    Bob Farrell has this rule that Dave Rosenberg always quotes that goes something like if the consensus is overwhelmingly in one camp, something else is going to happen. When an environment like that develops, I get interested in what the dissenters have to say. Reading and believing Rosenberg in early 2007 and into 2008 was a good idea, not so much since then. He was in a small camp of people who saw it all coming. Stephanie Pomboy is another. That aside, I totally agree with BR.

  15. catman says:

    I do a lot of trading but that is just a reaction to the ebb and flow of the market. My only two forecasts are the undervaluation of water, and the globalization of natural gas pricing. I have trouble sitting on positions and always hedge against myself at this point. Shit getting old.

  16. [...] someone you need to stop listening to. (By the way, one of the guys I follow, Barry Ritholtz, had this lovely take on that topic, on which he — smart man — agrees with me [...]