My Prediction: Your Forecast Is Wrong
On this day in 1993, the Wall Street Journal published a survey of 10 market pundits. They had been asked when the bull market that started in 1982 would end. Most of the forecasters predicted a 10 percent market decline -- hardly a bold position because 10 percent declines occur fairly often, about once a year on average. However, Joe Granville, among the most heralded market forecaster of his generation, declared that the bull run was over, and he foresaw the Dow Jones Industrial Average, then approaching 3,700, declining to 2,900 by the spring of 1994. Instead, the Dow went the opposite way, rising to almost 3,800 by year-end.
I was reminded of this yesterday, courtesy of this article by Bloomberg News: "Predictors of ’29 Crash See 65% Chance of 2015 Recession." Regular readers might recall that I have some issues with both forecasts and forecasters.
Let’s get some obvious stuff out of the way first: No, the guy who made the 1929 crash prediction isn't making a forecast. That was Jerome Levy, who no longer makes predictions (he died many years ago). Rather, this is a different firm run by his grandson. The methodology may no longer be the same, nor is the forecaster. This is the third generation of Levys making economic predictions.
Who knew there was a gene for prognostication?
Based upon some of the other forecasts of Levy the Younger, I can safely declare: No, there is not a gene for forecasting.
Let's start with the actual prediction: The Levy analysts envision a “65 percent probability of a worldwide recession forcing a contraction in the U.S. by the end of next year.”
Kudos for using a percentage, rather than a definitive statement, something we have discussed before (here and here). However, this is a repeat of a 2010 forecast for a 60 percent chance of a U.S. recession. At least Levy & Co. had the courtesy to wait four years before doubling down on roughly the same prediction.
If that error doesn’t make you skeptical, consider the Levy market call in a Barron’s interview made pretty much at the precise low, on March 9, 2009:
Now that things are blowing up, it has moved us back to much more conservative and cautious attitudes toward lending and asset valuation. This means the contraction in asset values and debt will ultimately be pushed even further than they would normally have to go. So it is going to take years and years.
That was bad. Levy repeated the negative forecast in December 2012, noting in a Bloomberg article, “This is a time to be defensive.” The Standard & Poor's 500 Index gained more than 30 percent during the following year.
If predicting the markets is a challenge, so is making economic forecasts. That same March 2009 Barron’s interview in which Levy was wary of equities contained this gem about a decline in gross domestic product:
How long before we start seeing GDP turning positive again?
The earliest recovery would be in 2010. But I am not sure we are going to get a recovery then, based on the economic-stimulus plan that has been passed so far, although it is moving in the right direction. But the enormity of what it is trying to overcome may be too great. It is very likely we will see additional moves by the government later this year, so there will be something added, mainly because of higher unemployment.
As you can see from the chart below, that was way off target. GDP growth turned positive pretty much at the very moment the forecast was being made. The next six quarters were in the black, as were 19 of the next 21 quarters.
I don’t want to pick on the Levys or anyone else -- its forecasters in general who annoy me. They also manage to lose the investors who follow them a lot of money.
Consider David Tice, who this past August warned of a 60 percent market crash. That might be scary, if you were unaware of the fact he made the same forecast in both 2010 and 2012. The first call had something to do with book value ("Federated’s David Tice Sees 'Huge' Potential For Decline"). The second was that "Gold Will Surge To $2,500 And The S&P 500 Will Plunge To 1,000." Meanwhile, gold has fallen by a third and the S&P500 has rallied to all-time highs. Perhaps this helps to explain why Tice’s Prudent Bear fund has trailed the S&P 500 by a huge margin.
I would be remiss not to mention what is perhaps the worst forecast of recent years: Meredith Whitney’s disastrous prediction for municipal bonds. This was a prediction so bad it all but ended her career as an analyst on Wall Street. She now runs Kenbelle Capital, a midsize hedge fund.
Despite the abysmal track record of almost all forecasters, the news media still loves them. It has air time and pages to fill and seems little concerned about giving space to money-losing prognosticators.
As I first wrote a decade ago, to forecast is folly. Today, we have Google Search to help us prove it. Pundits may forget, but not the Internet.
In the era of Google, forecasters make predictions at their own peril.
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