Fun with Forecasting, 2014 Review

Market Forecasts to Ignore in 2015
Economic and market forecasts in 2014 were wildly off-target.
Bloomberg, January 5, 2015

It’s that time of year again. All of the usual suspects trot out their forecasts for 2015 on markets, interest rates, gold, oil, economic growth and unemployment. You can set your calendars based on these prognostications, just as long as you remember to ignore their often-hilarious track records.

Regular readers know this is a pet peeve of mine going way back. As we have detailed here too many times to recount, these predictions are a silly waste of time. (I am the sole exception, as you can see by my flawless forecasts for 2014).

But that doesn’t mean they are not potentially damaging, affecting the psyches of traders and investors alike. As economist John Kenneth Galbraith once said, “The only function of economic forecasting is to make astrology look respectable.”

To bring a bit of accountability to the punditsphere, let’s have a look at some of my favorite forecasts for 2014. Keep these in mind when you read the 2015

predictions.

• Crash in Bonds: Last January, we were treated to a unanimous forecast of higher bond yields and lower bond prices. The year began with the 10-year yielding about 3 percent. It ended at 2.15 percent, confounding the experts. Jim Bianco of Bianco Research has been pointing out the money-losing futility of the bond bears for about five years.
• Inflation: The countryside is littered with the bodies of economists and fund managers alike, slain by their erroneous inflation calls. The call made in the Financial Times in January 2014 by Michael Aronstein deserves special mention. His Mainstay Marketfield fund (distributed by New York Life Investments) has been, as the FT observed, “the talk of the industry.” The reason: It quadrupled in size in 2013 to $18 billion, pulling in more money than any other actively managed mutual fund. As so often happens, chasing hot money managers leads to disaster: Aronstein’s wrong-way bet on inflation led the fund to lose 12.5 percent in 2014, a year when bonds were one of the best-performing asset classes.
• Stock-Market Crash: There have been so many erroneous calls for a stock-market crash that it’s hard to choose which deserves special mention. But I am going to give you two that merit attention: The first comes from Chapman University professor Terry Burnham, who predicted Dow 5,000 before Dow 20,000. He technically hasn’t been proven wrong yet, but during the years he has repeated this forecast, the market has gained about 40 percent. That makes him wrong enough in my book. The second was this article inFortune, “Why the bull market could end tomorrow.” It was filled with forecasts explaining why “smart prognosticators” and “market timing precisionists” believed the top was just about in. That was some 2,000 points ago for the Dow Jones Industrial Average and 200 points for the Standard & Poor’s 500 Index.

• Gold: I almost feel bad pointing out how awful the gold forecasts have been. But special mention must go to the loudest and highest forecast, and that means Peter Schiff of EuroPacific Capital. Last April, Schiff made the bold prediction that the “Federal Reserve’s quantitative-easing program will push gold to $5,000 an ounce.” How did he do? The shiny yellow metal began the year in the low $1,200s, rallied to $1,400, before plunging to $1,150. It closed 2014 just under $1,200 as the Fed’s program of QE was ending. Gold remains 80 percent or so lower than Schiff’s target.

• Oil: Almost nobody forecast that the price of oil would be cut in half during 2014. The punditry completely missed this story. There was one noteworthy exception: Gene Epstein, in a March 2014 Barron’s cover story, “Here Comes $75 Oil,” got the broad strokes right. He noted that “The long-term outlook for global oil prices is lower, perhaps much lower, giving a strong boost to the U.S. economy while potentially crippling the economy of Vladimir Putin’s Russia. Vast new discoveries of oil and natural gas in the U.S. and around the globe could drive the oil price to as low as $75 a barrel over the next five years from a current $100.” The timing may have been off somewhat, but that’s as good a prediction about oil as was made. It’s notable especially because it was an outlier, and the rest of the world’s economic writers missed it.

Come back next year, and we will revisit the worst forecasts of 2015.

Originally published here