What Predictions by Economists Can Teach You About Investing

An interesting article in Bloomberg noted that the recovery in this year's Treasury market has been stronger than the rally predicted by every economist they queried in a recent survey.
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An interesting article in Bloomberg noted that the recovery in this year's Treasury market has been stronger than the rally predicted by every economist they queried in a recent survey.

In mid-August, Bloomberg contacted 66 economists for their Sept. 30 forecasts on the 10-year yield for Treasury bonds. The 10-year yield closed on Aug. 28 at 2.32 percent. That was lower than the yield predicted by every single one of the economists surveyed.

While that observation is stunning, the balance of the article is even more puzzling. The authors quoted a bond manager and a money manager giving -- you guessed it -- their views on whether the bond market has more room to rally. The money manager opined that Treasuries "look expensive."

At the end of 2013, 10-year yields were a little over 3 percent. Investors who relied on the views of these economists to make financial decisions likely did not benefit from the increase in the price of these bonds.

You might think economists have special insight in predicting future interest rates. Obviously, they don't.

Market volatility and crystal balls

Predicting interest rates is relatively straightforward compared with trying to forecast when to get in or out of the market, which stocks are mispriced and who will be the next "hot" fund manager. Yet, that is precisely what pundits did in droves when the market experienced a broad sell-off on Sept. 25. The Dow Jones Industrial Average (DJIA) dropped 264 points. Investment "pros" like CNBC's Art Cashin enlightened viewers with his observation that this could be "the start of something big." In an effort to give his predictive powers some credibility, CNBC solemnly noted that, in the prior week, Cashin had "reported (with the acknowledgement it may be crazy) that 'several of the astrological types claim their charts show next week is fertile ground for surprises.'"

If you are relying on "astrological types" for predictive advice about the financial markets, "crazy" would be an understatement.

Cashin was not alone in his efforts to predict the future. His colleague, the ever-entertaining Jim Cramer, advised investors to abandon index funds and try their hand at market timing. Cramer offered to teach investors how to engage in this activity.

But Cramer rarely provides data to support his claims of stock picking and market timing expertise. My colleague, Larry Swedroe, reviewed several studies analyzing his stock picks. Swedroe's conclusion was sobering to fans of the "boo-yah" man: "There's no evidence of any stock-picking skills -- his picks are neither good nor bad. In other words, it's just entertainment." What educational value is there in that?

CNBC (which has a lot of air time to fill and advertisers eager to generate commissions and fees) also featured an interview with RiskReversal.com's Dan Nathan. Nathan peered into is crystal ball (which apparently is completely crystal clear) and predicted the S&P 500 index will "likely" drop to 1,900 by year-end.

Predictions and hucksters

It's sad that investors continue to rely on emperors with no clothes, who make predictions about random and unknowable events. Famed author and financial journalist Michael Lewis summed it up nicely in a post on Bloomberg. Lewis noted that in order to succeed on Wall Street "...you must believe, or at least pretend to believe, that you are an expert in matters where no expertise is possible. I'm not sure it's any easier to be a total fraud on Wall Street than in any other occupation, but on Wall Street you will be paid a lot more to forget your uneasy feelings."

The failure of economists to predict the direction of interest rates is a teaching moment for investors. Economists have legitimate credentials, but still can't predict random events. The likelihood that talking heads will have special insight into the future of the markets is about the same as "astrological types."

Your best course of action is to ignore them.

2014-04-01-Hiresfrontbookcover.jpgDan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth advisor with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is The Smartest Sales Book You'll Ever Read.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

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