On November 5th 2008, Queen Elizabeth visited the London School of Economics. Her wealth had just decreased by more than 25 million pounds. The financial markets were in fire and flame and Her Majesty wasn’t spared during the market’s massacre. The Queen’s response? She asked, aloud, "Why did nobody see this coming?"
The economists who receive the most public attention, have never forecast a recession before.
Just think about that for a second.
It is April 2008; the world economy is on the verge of collapse. The Financial Times is already talking about a "credit crunch." Northern Rock had been nationalized by the British government just moments before, while Bear Stearns went bankrupt (see The Big Short for an impression).
And 'the' economists?
Not a single economist — or at least, none of the economists who were part of the Consensus Forecasts Report — warned, at that time, for an incoming recession. And after the dust settled, just months later, 49 of the 77 countries were in a recession, among others the most important ones.
When it comes to forecasting, the track record of economists is, generally speaking, embarrassing. Nothing new on the horizon so far. But if we look at the investment industry, we see similar things: price targets are the gold standard, and the record of those who set these targets isn’t particularly good either.
Of course, the problem is that (nearly) everyone takes these forecasts and price targets seriously. I take them with a grain of salt.
John Maynard Keynes once jokingly said that he was looking “forward to a time when economists will be known as humble, competent men, on a level with dentists." After all, we don’t expect dentist to forecast rates of tooth decay by several decimal numbers. In the investment industry, analysts are expected to tell the difference between cheap stocks or investments and expensive ones. Yet that’s quite different from trying to quantify the future behavior of investors by (excessively) precise price targets.The investment analyst should act a little bit more like a dentist, and less like a fortune teller.
A year ago, I wrote that ABN Amro, a large Dutch bank, completely misappropriated their price target for gold. ABN, at that time, argued that the gold price would be $800 per troy ounce at the end of 2016. Later, they adjusted this upwards to $900/oz. Currently, the gold price is much higher, at around $1.200/oz. This means that ABN’s target price was becoming a bit…unrealistic. After all, a fall from $1200 to $800 or $900 would mean a fall by 33 or 25 percent.
A year ago I discerned ABN’s forecast, and came to the conclusion that their prediction was based on three assumptions:
- The economy is going to recover
- The gold price will fall as the economy is growing
- The Fed can hike rates without slowing down economic growth
All three assumptions are completely wrong.
Now that is becoming clear — and not only for us, but for the majority of people — that the economy is not recovering, ABN will finally have to admit that they were wrong. Despite billions spent on monetary stimulus. Because now Boele is arguing that their 'new' scenario anticipates a prolonged period of weak economic growth globally (but why wasn’t this scenario accounted for earlier?)Han Dieperink, Chief Investment Officer at Rabobank, another large Dutch bank, was even bolder: he said that the gold price would first have to fall to $500/oz.
Surely, it’s all fine that Boele admits her mistake and adjusts her forecast. But not for investors. What if investors had acted on that information a year ago, on basis of the information that the ABN Amro gave them?
That the issue with many analysts at major banks and wealth management firms. They make forecasts without paying the price when they are wrong. They have no 'skin in the game,' like Nassim Taleb would say. They never put their money where their mouth is.Perhaps Queen Elizabeth should have bought a kilo of gold after all?