When forecasts go wappy….

Tuesday 31st January 2017

In this issue of Money Truths….

  • Nobody knows. Not really….
  • When forecasts go wappy….
  • We can get it wrong as well as the next man….
  • Events – often diametrically opposed to expectation….
  • The consensus view – a fine contrarian indicator….

Nobody knows. Not really….

Nobody knows anything. Not really. Nobody knows what will turn out good, bad or ugly….

Nobody knows for sure which market, stock, commodity, bond or currency will rise or fall. By how much, at what rate or when….

Nobody can predict tomorrow’s financial climate – let alone the climate 3-months, 12-months or 5-years hence….

Of course, there’s a multi-billion-dollar financial services industry – populated with all manner of expert – which is dependent on convincing you otherwise….

Economists, bankers, analysts, money-managers, traders, financial advisors, politicians, press pundits and talking heads all make a living peddling the same deceit – that they know what’s going on and what will happen.

But they don’t know. They have mere beliefs and opinions. They make speculative forecasts.

But the thing with a forecast is that it represents an estimation or prediction made in the absence of any certain knowledge….

It amounts to guesswork. Some guesswork will be better-informed than other examples. But it’s guesswork all the same. And it can fall a long way south of actual outcomes….

When forecasts go wappy….

If you follow the financial beat, you’ll recall that Royal Bank of Scotland (RBS) analysts made some forecasts last year….

These serious people – who spend their working lives tuned-in to the finer market frequencies – crunched the numbers, read the signs and faithfully recited the standard magic spells. And they settled on their version of the immediate future….

The stock market was due a ‘cataclysmic’ slump….

Losses would amount to 20%. Stock investors were headed for a mauling. Fortunes would be decimated.

But don’t worry. These experienced prognosticators knew exactly what to do. Investors relying on their potent brand of sorcery were told to ‘Sell everything except high-quality bonds….’

In other words, sell all your stocks. Do it now. Before prices collapse. Unless you want to suffer….

Investors who took that advice must now be wondering if the bank’s water-supply had been spiked with hallucinogenic substances.

The RBS forecast tuned out to be almost surreal in its inaccuracy….

The stock-market didn’t slump. It didn’t drop 20%. It didn’t drop at all. It rose. Gains across 2016 amounted to 24%….

Investors who followed the bank’s advice to the letter, selling stocks and buying bonds, ended up forsaking an approximate 18% in overall returns….

We can get it wrong as well as the next man….

I raise the RBS example to highlight how highly-regarded and richly-rewarded experts – with every human and technological resource at their fingertips (money-no-object) – can and frequently do get it hopelessly wrong.

What chance do the rest of us have?

Of course, we return to our basic premise here at Money Truths: nobody knows anything thing. Not for sure. And we include ourselves in that assessment.

But here at Money Truths, we are nothing if not game. We are good sports. We don’t like to simply sit on the sidelines hurling brickbats at folk brave or foolish enough to pull on a bib and participate in the game.

We join in the madness. We pull on our own bib. We make our own forecasts.

In good faith. Not with any great hope of success. But simply to highlight that we are as blind and as ignorant as the next man.

And to prove to any remaining doubters that we can get it wrong just as spectacularly as anybody else….

We have never been quite as wrong as the RBS analysts. But then, they are professionals. Here at Money Truths we are merely enthusiastic amateurs.

There is only so much time we can devote to the forecasting game. We can’t be expected to scale the same wrong-headed heights as the pro-players….

Events – often diametrically opposed to expectations….

I bring all this to the surface because we made a forecast in last week’s issue of Money Truths….

We forecast that American stocks would crash on Donald Trump’s watch….

As is the case with many serious, long-considered, well-thought-out and gravely-composed forecasts, events immediately conspired against us and did the exact opposite to what our thesis requires….

On Tuesday, the S&P 500 and the Nasdaq hit new highs. On Wednesday, the Dow Jones Industrial Average Index broke through and closed above 20,000 for the first time.

Cue much fist-pumping and back-slapping in the land of the free….

Prior to getting elected, president Donald Trump referred to the stock market as a ‘big, fat, ugly bubble’.

But when the Dow broke through 20,000 on Wednesday, Trump was swift to his keypad to tweet the following: ‘Great!’ #Dow20k’

We’re confused about how additional rises in market values suddenly succeed in making that same bubble smaller, trimmer or more beautiful….

But Trump is new to his job. We will be charitable and put the mixed signals down to the great differences that exist between the script you follow when running for office and the one you rely once you get there. The bubble is clearly a different thing depending on which hat you’re wearing.

Meanwhile, not content with the bubble at its current proportions, some commentators are blowing hard and hope to see the bubble grow bigger still….

Andrew Adams, a market strategist at Raymond James, believes the current bull market still has many years to run before it fizzles out….

He says: ‘Based on history, we could still have 7 to 8 more years left, and there’s a chance it could go longer….’

The front cover of this week’s Barron’s is headed: Next stop Dow 30,000….

They reckon the Dow can keep on growing and hit that level by the year 2025.

‘Investment expert’ Nancy Tengler has been on record for a while with the view that the Dow can hit the 30,000 mark ‘in the next four to five years’.

This kind of talk and last week’s new high will only encourage die-hard bulls to harden on the view that the only way is up….

The consensus view – a fine contrarian indicator….

But we are not shaken in our belief that the tree cannot and will not grow to the sky.

What goes up will come down. We maintain that the overdue market correction will indeed arise during Trump’s term in office….

We are not concerned that a magazine as prestigious as Barron’s stands squarely against our viewpoint. We take encouragement from their position. We see it as a great contrarian indicator.

The Barron’s headline merely reflects the consensus. It simply expresses what the mainstream majority believes.

The mainstream view is that the US stock market is healthy. That its legs and lungs are strong. That it can climb higher. To ever-more-dizzying altitudes. Over-coming thin air and rarefied weather to ceaselessly conquer new peaks.

The mainstream view is that the market can climb to the moon. Regardless of whether there is solid ground underfoot. Or good footholds along the way.

The mainstream view is that the ropes will hold strong. Now and forever. This climber cannot fall. He only goes up. Nothing can bring him down. Gravity has no influence on this mountain man. No avalanche can shift him.

These are silly beliefs. And when the majority believes them – as it does now – that is as good a time as any to expect the imminent appearance of the opposite scenario.

Our forecast was wrong across the last 7 days. Events went the other way. But we have the next four years in which to be proved right. And we believe we will be.

Just as the RBS analysts believed whole-heartedly in their forecasts, so too do we retain the faith in our own….

We don’t imagine too many of you are heavily invested in US stocks. We merely focus on the US situation because it is so interesting and so front-and-center right now.

We wouldn’t want our money in the US stock market….

But if not there, then where?

Funnily enough we have an idea or two about that too. We reckon there’s an overlooked stock market that will prove spectacularly profitable. And it’s not where you think….

I’ll be coming at you with that next Tuesday.

That’s how it looks from here….

All the best,

Dave Gibson

Money Truths