Earned Trust is a Fleeting Commodity

September 9, 2015

Never trust completely what you hear from financial market advisors.  Decades of experience in this business have led me never to attach 100% or 0% probability to a forecast.  Even the top guns in the business have been known to get the outlook entirely wrong, and as an example I came across in my files a prediction of a “major bear market” in U.S. Treasuries predicted by the head economist of a major brokerage.  The forecast was made in late May 2007, just over two months before the start of the subprime mortgage lending crisis that triggered the biggest global recession since the Great Depression.  The brokerage house was one of the few to survive the crisis, and this forecaster is still very active in the business but working for a different company.  Here are some excerpts from his May 2007 prediction to show just how wrong the smart money can be:

The global economy is on fire.  The U.S. industrial sector is rebounding, European growth has remained robust and China and many other emerging market economies are continuing to do well.  I expect the second leg of the global upswing to be driven by a stronger capex spending response to rising capacity constraints.

Central banks are becoming more hawkish.  The People’s Bank of China is tightening policy, the European Central Bank has further to go and the U.S. Federal Reserve will likely keep rates in restrictive territory for longer.

Global inflation fundamentals are deteriorating.  Food and energy prices are rising, labor markets are tightening, and capacities are highly utilized.

The ongoing recycling of commodity producer and China surpluses into bonds may provide some offset, but the central banks of the surplus countries are more keen on putting money into risky assets.  Hence, the bubble is likely to move from bonds into equities.

Even after all that happened since the summer of 2007, advisors have been trying to herd investors away from fixed income assets and into stocks.  They’ve touted the global economy and warned repeatedly that accelerating inflation lies just around the corner.  On Bloomberg radio earlier today, David Stockman, President Reagan’s OMB director and a lifetime true believer in supply-side economics, was haranguing Fed policy and, citing the big growth in the central bank balance sheet, predicting much higher inflation.  His is a time-worn refrain based on a simplistic understanding of monetary economics.  Like Linus and the never-arriving Big Pumpkin, their wait continues with undiminished certainty in the correctness of his view.  Being curious, I looked up Stockman’s career path and found an undergraduate degree majoring in history, graduate courses at divinity school, a political career marked by a few years in the House of Representatives before the aforementioned appointment by Reagan, and then a business career managing tons of money at an investment bank. 

What ever happened to credentialing?  Doctors have to go to med school and pass their boards.  Lawyers need a law degree and passage of the bar to practice their career.  A road test is required to prove proficiency before a new driver is allowed behind the wheel driving alone.  But politicians overseeing the economy, the central bank, and all sorts of other life-and-death matters need only pass a popularity vote to secure immense power over peoples’ lives. 

Even the most trained economists can commit gigantic forecasting blunders.  Still one’s odds are better seeking the advice of somebody with credentials, papers if you will, than politicians who lack professional training in pertinent areas.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



Comments are closed.