Monday, June 4, 2018

This Week's Message: The Folly In Forecasting

Staying with last month's theme, we'll begin this week's message by quoting from James Picerno's Nowcasting the Business Cycle:
"....if you listen to commentary from the wider world, you're sure to be whipsawed with conflicting interpretations on every new data point. Quite a lot of what you'll read or hear is short-sighted, mistaken, and downright wrong. Historical perspective is essential to evaluating the business cycle, but you'll have to dig deep to cut through the noise."
"The news media, of course, is focused on headlines, drama, and how the number du jour relates to last month or the previous quarter. It's also obvious that the analysts making the boldest claims tend to receive the most attention. News without proper context, however, tends to be deceptive at major turning points for the economy. It may be entertaining, but it's not terribly helpful." 
"Keep in mind, too, that some economists may have a political axe to grind, particularly when a new election is approaching and it's in their candidate's interest to promote (or attack) the macro trend of the moment." 
Putting the above in a nutshell (and please pardon my cynicism); beneath virtually all of the unsolicited economic forecasts that come our way lie egos in need of attention, analysts desperate for credibility, and/or economists whose job security holds precedence over accuracy and empirical truth.

I'll go so far as to say that any forecast that focuses on more than, say, a few weeks or maybe a few months into the future should be dismissed out of hand.

Frankly, alas, there's more worthless  destructive punditry flying around these days than I ever could've imagined. Reason being, the media, Youtube's star econ and investment "analysts", and politically-captured economists have figured out that most folks are every bit as possessed by their biases as they are.

Yes, lacking proper context, the doomsayers will offer up what amount to sound bites on how this country has been descending into Hell via a hand basket for decades, and on how we're either at last turning things around and recapturing some lost greatness, or on how the elevator to Hell's cables have been severed and we're thus now careening into a dark economic underworld. All smack-dab in the face of technologically-enhanced/enriched lives that their grandparents could never have remotely dreamed of. Of course there are the equally egregious forever optimists who dismiss every deteriorating data point as mere noise and point to nothing but tech-paved paths to prosperity as far as the eye can see. 

Regardless of whether you sympathize with the doomsayer, the bleary-eyed optimist, or neither, whenever you find yourself taken by some "expert's" exposé on where we go from here, please stop and ask yourself, since the marketplace is ultimately the manifestation of the thoughts, hopes, fears, desires and biases of 7 billion individuals, how in the world can anyone accurately forecast its future? Well, no one can! Not on any semblance of a consistent basis that is. Again, virtually all attempts are simply manipulations...

All of the above said, I believe a reader could legitimately ask "but don't you guys forecast? Isn't that what you're doing each week with your analysis and the scoring of your index?"

Good question! And while we will illustrate throughout the year what our analyses say about probabilities going forward, we view them as just that; assessments of probabilities -- which is distinctly different than forecasting. For, in a forecast, the analyst predicts where things will stand for a given stock, a market, the economy, etc., at some future point. An assessment of probabilities says that based on the evidence we have in hand, the risk in a given security, a market or the economy in general leans either to the upside, the downside, or to consolidation (sideways) going forward.

By never investing our egos in predictions -- by understanding that, despite our personal biases, the economy forever moves through periods of expansion and contraction -- we are free to assess the world as the evidence in hand demands, while keeping an open mind to all possibilities and acting accordingly within client portfolios...

Have a nice week!

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