Saturday, February 28, 2015
FAIRFIELD-SUISUN, CALIFORNIA
99 CENTS

Once again, forecasters get it wrong

stevenson column sig

By
From page B7 | August 03, 2014 |

I was all set to write this column until I looked at the Yahoo Finance website. Imagine my surprise when I saw the headline, “Joe Biden likes to go skinny dipping in White House pool,” according to a new book allegedly sourced by Secret Service agents.

I struggled to get the image out of my mind and finally found the story I had saved. Here it is, from The Wall Street Journal’s Monday edition: “Forecasters Eat Stocks’ Dust.” I have to admit, I had a brief burst of confusion before I got to the story, which, if I may say so, points out something that I’ve maintained since Grover Cleveland was president.

Here’s the first sentence, based on actual results: “Wall Street market forecasters have been caught flat-footed by stocks’ rally this year.” The basis for their useless, and perhaps costly, predictions was the totally incorrect forecast that the first half of this year would see sharply rising interest rates.

They assumed that a strong economy would force the Fed to reverse what they called their “easy money” policy of the past five years. Why would the Federal Reserve do that? The old, old saying about the Fed was that, in a strengthening economy, they would “take away the punch bowl before the party got going.” They presumed, based on economic history, that “too many” people working meant that demand for goods and services would increase. History told us that when more people had jobs, the “vicious circle” would begin.

The vicious-circle theory said that this sequence of events – more jobs, more income, more demand, static supply – meant too much money chasing too few goods (and services). For starters, companies wanted to meet the higher level of demand, and to do that, they would increase their borrowing from banks. Of course, in order to meet the additional demand, banks would raise the “price” of money, which translated to higher interest rates. Thus, higher interest rates meant higher prices throughout the economy. In theory, higher prices would put a damper on demand, which would lessen the chance of inflation.

What does this unintelligible explanation mean? It means that the majority of Wall Street’s million-dollar analysts will keep drawing their million dollars from banks and brokerage firms who care more about their pedigrees than their results. The main job for most of these pointy-headed analysts is to meet with “big boy” clients and first, gloss over how useless they are, then offer a new forecast that is just as likely to be all wrong as the previous one.

The fact that the current crop of strategists showed, on balance, no skill at predicting the future, doesn’t mean that there haven’t been very accurate analysts over the years. I’ve mentioned the two strategists from the 1970s (that long ago?), who were so good that they could move markets. They were Henry Kaufman and Albert Wojnilower, known – because of their extreme bearishness, combined with accuracy, publicity and certainty – as Dr. Doom and Dr. Death. To say that the two were respected would be an extreme understatement, since Wall Street trembled when either of them spoke.

I can only imagine what would have been the effect if the Internet had been around back then. There would have been instant tidal waves of selling or buying when either of them spoke.

My late, beloved mother once asked why this column wasn’t nationally syndicated and why I wasn’t on television since I was so smart. On the other hand, my wife Clare would echo the well-known insult: if you’re so smart, why aren’t you rich? How rude.

Bud Stevenson, a retired stockbroker, lives in Fairfield. Reach him at [email protected]

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