Big News, Economy Meets Financial Forecast: A Fantasy Tale

I do have to apologize for the rant I am about to go on, but I have something to get off of my chest.

Why do the financial experts even bother to forecast what will happen?  At this point, they are right less often than long term weather forecasts.

The rate at which the economy will grow?  I think I would have as good of a chance of estimating it as I do of picking the score for the Super Bowl at half time (and we still have about 3 months of football left to decide who is going to play in that game).

How about the unemployment rate? Here, I’ll make a guess, 7.8% at the end of Oct.  I think I have a 25% chance of being right and I will probably be right more often than the so called financial experts.

I could go on, but I think you see my point.  I am not so much upset by the forecasts, but by the conviction with which they are made.  The experts are experts because they study the markets and make educated guesses based on past experiences and the mathematical model that they choose to subscribe to.  Sticking with the football analogy, it’s a matter of choosing to play a Wishbone Offense vs a West Coast offense and they each get to make their choice.

However, we as the consumers of the various financial sources out there, be they the Wall St Journal editorials, the various financial institutions (be they your Goldman Sachs or Fidelity or whatever institution you choose to entrust with your money), none of them have a crystal ball that will tell them what price that stock or commodity or derivative will have 1 week out, 2 weeks out or a year out. However, they products they sell (investment advice and handling of the transactions) are packaged as if they really know what is going to happen.  This, I object to as it leads to a sense that the markets are something that are predictable and tamable when they truly are not.

The truth is that hurricane Sandy is more predictable that the DJIA or the S&P 500, and any pretense that the “economy” is anything more than a system created to facilitate the movement of funds between those willing to invest and those in need of said investment, but which has gotten well out of control due to the success with which it has made rich folks richer and small companies into behemoths of industry; any such pretense is simple fantasy.

Let’s wake up folks, there is no economy.  There are entities and they exist and interact in a defined space, but those entities are too many and too unpredictable to be considered as predictable as a whole. What I mean to say is that we should not try to predict the economy as a whole or try to base our investments on the performance of the job market or the DJIA or NASDAQ or S&P as whole entities.  What we should do is look at the variables that affect the thing that we are looking to buy or sell and in that case, predictions are much more feasible.

I am not a financial expert, but with a little common sense and logic, I think you’ll find that my opinions on this subject are not wholly terrible advice.