Swedroe: The Surprising Lessons Of QE

November 05, 2014

More Faulty Forecasts

The unemployment rate also ignored the forecasts of those 43 economists. It fell from 9.8 percent in November 2010 to its current level of 5.9 percent. Strike four.

Forecasts by gold bugs didn’t turn out to be correct either. For instance, Peter Schiff has talked about the possibility of gold hitting $5,000 an ounce or higher since at least 2011, when prices for the metal topped $1,900 in intraday trading.

Not only has the dollar risen, with inflation under control and interest rates down slightly, gold actually has fallen from its November 2010 close of $1,384 to about $1,200 currently. Compare that with the return to stocks over the same period. The S&P 500 index closed November 2010 at 1,180. On Oct. 29, 2014, it closed at 1,982.

Even on a price-only basis (the index doesn’t include the return from dividends) that’s an increase of 68 percent. Adding in the dividend return, the gain is in excess of 75 percent. That’s five strikes.

Yes, 100% Of Economists Got It Wrong

The following should be an enlightening tale.

Each month, Bloomberg surveys economists to ask them about the direction of interest rates. In January, 97 percent of the economists surveyed said they expected interest rates to rise within the next six months. In February, 95 percent had that expectation. In March, the figure was back up to 97 percent.

With the yield on the 10-year Treasury note at 2.7 percent, the April survey showed that 100 percent of the 67 economists surveyed expected interest rates to rise within the next six months. Yes, 100 percent of them were wrong.

That so many economists were so wrong shouldn’t come as a surprise.

Faulty Forecasting: A Way Of Life

There’s a wealth of research showing that when it comes to financial markets, there really aren’t any good forecasters. For those interested in the evidence on the ability to forecast accurately, I recommend “Expert Political Judgment” by Philip Tetlock and “The Fortune Sellers” by William Sherden.

On an amusing note, Tetlock did find that the only thing correlated with forecasting accuracy is fame, and that correlation is negative. The more famous the forecaster, the less accurate the forecast.

It’s important to remember that, while the Fed’s actions created the risks highlighted in many of the forecasts, few events ever occur with anything close to the certainty often expressed by ever-confident “gurus.” Confidence, like in the case of the aforementioned Peter Schiff, is no substitute for accuracy.



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