Wednesday, 13th February 2019
Let’s start rating economic forecasters….
Some folk collect stamps….
Here at Money Truths we collect economic and market predictions that turn into train-wrecks….
Perhaps we have a strange sense of humour. Perhaps we are simply warped. Maybe a bit of both….
But we collect these things anyway….
Primarily, because they amuse us and because laughter is always the best medicine….
But also, because these tales of wrong-headedness serve as a constant reminder of the fallibility of ‘experts’ when it comes to predicting the future….
- Off-beam certainty….
Take Irving Fisher, for instance….
He was a smart guy. He was widely considered one of the great economists of the first half of the 20th century. He figured out the relationship between inflation and interest rates, among other things….
He was just the type of guy you might expect to know what was going on – and what would happen next….
But the world – especially the world of money – doesn’t work that way. It can make a fool out of just about anybody. Even Fisher fell victim….
Back in 1929, Fisher had this to say about the stock market….
‘Stock prices have reached what looks like a permanently high plateau…. I expect to see the stock market a good deal higher within a few months….’
But markets are not interested in what men think. Even the best of men. And just a few days later, the market crashed – eventually losing 89% of its value and ushering in the period known as the Great Depression….
Fisher had got it about as wrong as was possible….
- Major misread….
Modern titans too have been made to look foolish when their prognostications blow up in their faces – like exploding cigars….
Alan Greenspan, for instance….
In September 2007, Greenspan’s memoir – The Age of Turbulence – was released for public consumption….
Inside, Greenspan made a big prediction. He said that inflationary pressures would result in US interest rates heading up to 10% and more….
Now, you might expect Greenspan, who was top man at the Federal Reserve from 1987 to 2006, to have his finger on the pulse of US interest rates and to know where they were headed – at least short-term….
But you might as well have asked the average American truck driver where interest rates were going next. He might have done better job of calling the direction of travel than Greenspan….
Just one short year after Greenspan’s prediction went public, the US interest rate was at historical lows – and heading for zero….
- Reputation counts for nothing….
And it is not just individuals that call the future and map out how things will pan out – only to be proved totally wrong. Big institutions frequently get in on the game too.…
Take the venerable Bank of England (BoE), for instance….
What institution on the planet enjoys a deeper and richer reputation for economic analysis than the Old Lady of Threadneedle Street?
With all its financial, technological and human resources – and with more sober-suited PhDs per square foot than any other building in London – you might think of the Bank of England as the one place to head to for a reliable steer on what will happen next….
But even the BoE can get its wires badly crossed. In August 2016, for example, the Bank totally misread the immediate impact of Brexit….
The BoE said exports would go down by 0.5%. They went up 8.3%….
It said business investment would fall by 2% It went up 1.7%….
It said housing investment would drop by 4.75%. Instead, it went up 5%….
And remember these are forecasts produced by the cream of the pointy-head brigade – experts in their respective disciplines, authorities on their subjects, masters of the universe. These are the guys that set interest rates….
- Unblemished records?
Prakash Loungani at the IMF did a global study on the accuracy of economic forecasters. It revealed that economists had failed to predict 148 of the past 150 recessions….
That 98.6% rate of failure moved Loungani to comment thus: ‘The record of failure to predict recessions is virtually unblemished….’
History has shown us time and again that that experts are often not much better than the ordinary man on the street when it comes to forecasting the future. Economists – often paid good money to do to the job – are no exception….
But try telling that to your average economic forecaster whose living might depend entirely on his ability to predict outcomes correctly. They don’t like criticism….
So much so that Peter Dixon, an economist at Commerzbank, has conducted his own analysis….
Apparently, he’s got access to Treasury databases that contain the individual forecasts of between 30 and 40 economists – and the records go back years….
What Dixon discovered is this: last year’s economic forecasts were the second-most accurate since 1986 and beaten only by the quality of forecasts produced in 2015….
I don’t know about you, but that smells like a contrarian indicator to me….
I don’t know if the 2018 performance was an outlier on the scale or whether the findings of the analysis amounts to little more than hubris. Either way, I’d be anticipating a reversion to mean any time now….
I’d be expecting forecasters to fail to live-up to the performance and/or the claims this time around….
- On the record….
I’ve got an idea. I think we should start recording and rating the forecasts of economists – so we know where we are with them. So that we can know who we might trust to be in the ballpark and who we are best advised to ignore….
The technology exists. So too the culture….
Go to any pub or restaurant and you can rate the beer, the burger, the toilets and the service on Trip Advisor….
Looking for a tradesman you can trust? Checkatrade rate tradesman on the back of 4.2 million customer reviews….
Trustpilot does a similar thing – providing a repository for customer reviews of businesses and the services and experiences they provide. So that prospective customers can check out who rates (performs) best….
In my own business, the betting selections of each of our sports-betting platforms are on record – available online to be checked and verified at any time….
Reviews, ratings and results are a constant and growing feature of online life. Such things are designed to tell us something about the reliability of the individual, business, product, service or experience being measured….
Why not apply the same strictures to the economic forecasters? Let’s see what they had to say. And let’s rate it based on how it turned out….
I’m not suggesting a witch hunt, of course. Forecasting is fraught with many difficulties and I appreciate that….
But in a world where certainty is a rare commodity, it would surely be good to know for certain which economic forecasters have a track record of seeing furthest and best?
That’s how it looks from here….
All the best,