Swedroe: Forecasters Not Held Accountable

Dow Could Crash 17,000 Points

This isn’t my forecast. But it’s a good reminder that you should ignore all such forecasts. And it’s a good example of why I keep a file of forecasts—the financial media almost never hold forecasters accountable because that would ruin the game, and people would cease to “tune in.”

This particular forecast of the Dow dropping 17,000 points is from a Dec. 10, 2016, CNBC interview with demographer, economist and author Harry Dent to promote his new book “The Sale of a Lifetime: How the Great Bubble Burst of 2017‒2019 Can Make You Rich.”

The previous day’s close for the Dow was 19,757. (Note that as I write this on May 2, 2017, the Dow closed at 20,950, a gain of about 6%.) The real question is why CNBC would have Harry Dent on the air (I’ll explain later) when virtually every forecast he has made over the past 20 years has been dead wrong, as you’ll see.

A Previous Example
We’ll begin by examining an earlier CNBC interview with Dent from September 12, 2011. Over the prior four calendar months, the market had lost about 10% and the Dow Jones Industrial Average (DJIA) had closed just below 11,000. Let’s take a closer look at Dent’s forecast, which was based on the “changing spending habits of global consumers.”

• “I think the stock crash started in late April. This is just the first wave down ... I think the crash really starts some time in early 2012.”
• “Baby boomers around the world, and all the developed countries—Europe, North America, Australia—have peaked in their spending cycles ... and now they’re going to be saving and not borrowing.”
• “That debt is deleveraging, and that's actually causing deflationary trends. It won't matter how much stimulus the government throws at the system, because baby boomers with their already-huge debt burdens will not want to borrow money and spend more.”

Dent went on to compare the current situation to the Great Depression: “That’s what happened—deflation came in such a deep downturn because so much debt was deleveraging.” Sounds pretty scary and compelling—remember, he’s both an economist and a demographer.

The financial media loves to highlight forecasts because they need investors to “pay attention”—that’s the winning strategy for them even though they know, or should know, it’s the losing strategy for investors. And they anoint the latest guru who happens to get one forecast right.

However, holding forecasters accountable is as rare as the proverbial “black swan.” Jason Zweig, columnist for the Wall Street Journal, pointed out that pigs will fly before you’ll ever see a full list of an expert’s past forecasts, including the bloopers. So somebody has to do the job for them.

Shortly after Dent’s forecast on CBNC, the market turned around and began a huge rally, with the DJIA rising by more than 9,000 points, leaving Dent’s forecast off by about 20,000 points. What’s perhaps even more interesting is that this missed forecast only adds to the long list of Dent’s incredibly ill-timed forecasts.

The Broken Clock
Dent achieved fame and “guru” status with the successful forecast of a booming market he predicted in his December 1993 book “Great Boom Ahead: Your Comprehensive Guide to Personal and Business Profit in the New Era of Prosperity.” But as the expression goes, “even a broken clock is right twice a day.”

In October 1999, Dent’s best-seller “The Roaring 2000s: Building the Wealth and Lifestyle You Desire in the Greatest Boom in History” was published. Dent predicted the Dow might reach as high as 35,000 within the next decade. Of course, that 10-year period is now known as the “lost decade,” with the Dow closing at 10,428, lower than where it began the decade, and only about 25,000 points below Dent’s forecast of 35,000. And the Dow is still about 14,000 points below 35,000.

In January 2006, his book “The Next Great Bubble Boom: How to Profit from the Greatest Boom in History: 2006‒2010” was published. Once again, it would have been hard for Dent to have gotten this one more wrong, as, not long after publication, we experienced the worst bear market since the 1930s.

It is virtually impossible for Dent to have been more wrong with his last several forecasts. Which begs the question: Why would CNBC, or anyone else in the financial media, provide Harry Dent with any credibility by giving his forecasts an audience? The answer is simple: Scary headlines attract attention.

One can only imagine how much damage was done to their portfolios by investors who followed Harry Dent’s advice. CNBC’s listeners would have been better served by heeding the advice of Warren Buffett: “We have long felt that the only value of stock forecasters is to make fortune-tellers look good.”

The next time you’re tempted to act upon some guru’s forecast, remember Buffett’s advice and the tale of Harry Dent.

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.