The Forecasting Issue

In December we do a chocolate recipe. In January we are expected to comment on the year ahead.  The Financial Times did an excellent piece on looking at the future in its September 6–7, 2014 issue. They noted that talking about the future is not really about the future at all but about the problems of today.  Forecasts are often advertisements or conversation pieces or declarations of ‘tribal loyalty’, the article noted.  The important thing is not accuracy but giving readers the reassurance that things have been thought about.  

The future often plays out based on unknowns, the events that come out of left field so to speak.  For instance, at the beginning of 2014 who would have predicted that interest rates would fall? Everyone knew they were going to rise. At the beginning of 2014 few people had ever heard of Islamic State or thought that Russia was going to invade Crimea or that the combination of increased U.S. oil production and a slowdown in world demand would push crude prices down by half. 

So when looking at 2015 how do you come up with, and then factor in, the unknowns? The answer is, you probably can’t. The best you can do is to think of where conventional wisdom may be wrong. It is generally accepted for instance, that the U.S. will outperform the rest of the developed world in 2015. We are creating jobs here, our interest rates are low, profitability is high and consumer spending is strong. But the slowdown in Europe, Japan and even China begs the question, can the U.S. continue to pull this train without help?  This is an important issue in 2015.  The chart below shows that this recovery has favored corporate profits over worker income.  But with unemployment now below 6%, the surprise could be that we are closer to full employment than we think and the pleasant surprise would be that wages start to outperform. This would certainly hurt profitability but it would also have a strong positive effect on consumer spending and the overall economy.

John Maynard Keynes is considered one of the great investors of all time.  He started his career making economic forecasts and then investing off these predictions. The results were not very good. Later he stopped making macro forecasts and instead simply invested in good companies with solid prospects and high dividend yields. His results improved immediately. The moral is, you won’t succeed long-term making predictions about the future. One time you will be right and the next time you will be wrong. It is much better to spend your time working out the right long-term investment strategy for your own risk and return needs - and then stick with it. Patience is a great virtue in almost all economic and market cycles.