Economic Forecasting and Your Portfolio

October 5, 2016

This headline if it were from any other publication than the London Daily Telegraph would have been cast aside by me, but when Sir Charles Bean the Deputy Governor of the Bank of England said recently that people shouldn’t rely on economic forecasts, I had to read the article. Economic forecasts he said, “should be taken with a pinch of salt” and that predictions can be made with a “wide range of uncertainty.” Those words made me smile, because for the longest time I have been saying exactly that and now it is so refreshing to hear someone of his stature articulate the same position.

How many predictions did Nostradamus make that were correct? Only a handful, but the ones that didn’t come true have been conveniently forgotten. Anyone with half a brain could do the same. I could come up with every possible scenario and at least one would come true, and for that I could develop a following. How many times have you seen economic articles that included the words, “he was the only one to correctly predict the collapse?” I bet you if you were to think about them, they are in the hundreds, but how many of those correct predictions were followed by another correct prediction? Not many, if any at all.

The famed economist, John Kenneth Galbraith, once said that “the only function of economic forecasting is to make astrology look respectable.” How absolutely correct, yet we allow economic forecasters to spell gloom and doom when 90% of the time they have a vested interest in the outcome. But, if the investor did the opposite, I pull the numbers out of my head, more likely than not, their decisions would work out in their favor.

Let’s look at the latest predictions. Brexit was supposed to be very bad for Britain. We were told that Britain needed Europe, only to find out that it’s really the other way around. How has the DAX performed YTD, negative 1.46%. How about the FTSE, YTD positive 12.67%. Who would have thought that would be the case?

How about ETFs? iShares MSCI Germany ETF (EWG) is up 3.21%. Interesting. Now let’s compare WisdomTree United Kingdom Hedged Equity Fund (DXPS), which is up 20% YTD and iShares Currency Hedged MSCI United Kingdom ETF (HEWU) up 16%. The point I am trying to make is that when it comes to investing, trust your gut. Don’t trust people with more degrees than a thermometer, because they work off mathematical models. Remember something very important. Unlike mathematics, which is a very exact science, economic forecasting is pseudo-science with too many moving parts. If you rely on a crystal ball for your investing, invariably you will end up eating ground glass.

And to top it all off, the International Monetary Fund just, “crowns UK world's fastest growing major economy.” See what I mean?

 

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