On February 2, Ground Hog Day, Punxsutawney Phil failed to see his shadow forecasting, and as legend has it – an early spring. Yet on the first day of spring, I looked out my back window at a lake still more than half frozen with my view partially obscured by a wicked little snow flurry. So much for forecasts!
One ambitious prosecuting attorney has been so infuriated with Phil’s failure in the face of almost unprecedented cold in the Midwest during the last two weeks that he has sought an indictment of the furry mammal. According to the Fox News the indictment reads:
“Punxsutawney Phil did purposely, and with prior calculation and design, cause the people to believe that spring would come early,” Mike Gmoser, the prosecutor in southwestern Ohio’s Butler County, wrote in an official-looking indictment.
Gmoser said that Punxsutawney Phil is charged with misrepresentation of spring, which constitutes a felony “against the peace and dignity of the state of Ohio.”
The Ohio prosecutor is asking for the death penalty. Phil was sought for comment, but did not have a listed phone number. He is, however, said to have a lawyer who has announced plans to fight extradition to Ohio, and his handler has indicated that he thinks Phil “can beat the rap.”
Unfortunately, most forecasters can’t beat the rap. In his book The Fortune Sellers, William Sherden reviewed the records of the various forecasting organizations. According to CBS News, he concluded that:
- Economists cannot predict the turning points in the economy: of the 48 predictions made by economists, 46 missed the turning points.
- Economists’ forecasting skill is about as good as guessing. Even the economists who directly or indirectly run the economy (such as the Fed, the Council of Economic Advisors and the Congressional Budget Office) had forecasting records that were worse than pure chance.
- There are no economic forecasters who consistently lead the pack in forecasting accuracy.
- There are no economic ideologies that produce superior forecasts.
- Increased sophistication provided no improvement in forecasting accuracy.
- Consensus forecasts don’t improve accuracy.
- Forecasts may be affected by psychological bias. Some economists are perpetually optimistic and others perpetually pessimistic.
In fact, on the subject of forecasters, Michael Evans, founder of Chase Econometrics (now IHS Global Insights), confessed: “The problem with macro [economic] forecasting is that no one can do it.”
Just like Phil, who has been right only about 39% of the time, the forecasters just keep forecasting.
Weather aside, the latest forecasting I’ve taken note of comes from the army of analysts for the Wall Street crowd. Although last quarter brought the best earnings reports in some time, it also had one of the highest positive earnings revisions rates in a few years, which reflects badly on the analysts who made the original forecasts. Although we are now between regular earnings reporting seasons, I note that last week of the 55 “off season” reports issued, 31 beat forecasts, 20 missed, and only 4 were inline.
Similarly all of last year, and now again this year, the same group has been revising their earnings forecasts lower for the next earnings reporting period in the face of rising earnings. Bespoke Investment Group reports that: “…going back to last May, there has not been a single day where the four-week rolling total of positive revisions has outnumbered the four-week rolling total of negative revisions.”
When it comes to reports on the economy, we’ve observed the same effect at work. The economists that spend their whole professional lives poring over the economic data rarely get it right in projecting what will be reported in the never ending rain of economic reports from Washington. Yet Wall Street goes crazy every time they are wrong. Since they are mostly wrong, we get a lot of days where markets are reacting to some new report – positively or negatively. Last week, six reports were better than expected (the experts were too low) and four were weaker (the experts were too low); nobody played Goldilocks and had it just right!
The point of all this is that forecasts can be fun to talk about but you can’t invest based upon them. We find that the actual trading history formed by buy and sell trades of real people are a better way to invest. That’s why our computers scour the data downloads each day to determine the primary trend of stock, bond and alternative investments on the more than forty different platforms we invest in for over 20,000 client accounts.
In his book, Sherden relates the following incident which CBS News reports on:
In 1985, when preparing testimony as an expert witness, he analyzed the track records of inflation projections by different forecasting methods. He then compared those forecasts to what is called the “naive” forecast — simply projecting today’s inflation rate into the future. He was surprised to learn that the simple naive forecast proved to be the most accurate, beating the forecasts of the most prestigious economic forecasting firms equipped with PhDs from leading universities and thousand-equation computer models.
The trend is our friend and the past is prologue to the future they say – no one mentioned forecasters.
By the way, a late report just crossed my desk, Punxsutawney Phil’s “handler,” Bill Deeley, president of the Punxsutawney Groundhog Club’s Inner Circle, on Monday told The Associated Press that the animal rightly predicted six more weeks of winter last month, but Deeley mistakenly announced an early spring because he failed to correctly interpret Phil’s “groundhog-ese.”
The Ohio prosecutor has offered a pardon.
Gee, you can’t even trust a Pennsylvania groundhog handler. What’s the world coming to?
All the best,
Jerry
PS- I’d also like to throw the book at Eurogroup President Jeroen Dijsselbloem who told Rueters today that the Cyprus deal announced last night could form the template for other Euro debt deals. Since the Cyprus deal included a tax on savings accounts over 100,000 euros, that statement sent the European markets, and especially European bank shares, into free fall. Even our markets took a hit.
It used to be that Europe was a center of manufacturing and craftsmanship, but over the last couple of years they have become better known in financial circles as manufacturers of uncertainty. Hopefully, as has been the case in the past, the US markets will once again right themselves after these Euro events are long forgotten. Our computers will still be tracking the data to find out.
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