Financial Forecast Sophistry
“Economists have predicted 9 out of the last 5 recessions.”
“If you lined up all the economists in the world end to end . . . they wouldn’t reach a conclusion.”
“If you lined up all the economists in the world end to end . . . it wouldn’t be such a bad thing.”
As you might surmise from the above quotes, I’d take with a grain of salt any article that prominently includes the disclaimer, “if the economists’ forecast is accurate . . .”
In this case, what’s being forecast is the performance of the U.S. housing market.
According to The Wall Street Journal’s lead headline today, “Home Forecast Calls for Pain,” “home prices are expected to drop 2.5% this year and rise just 1.1% annually through 2015.”
The foregoing hits the trifecta of what I’ll call “the art of credible forecasting”:
–The time horizon is immediate enough to grab your interest — but distant enough that no one will remember if the forecast misses the mark.
–The percentage changes are highly specific, down to fractions of a percent (2.5% and 1.1%, in this case). Realtors know that this technique implies precision and accuracy (which is why you occasionally see a home listed for $297,154 or something equally ridiculous).
–The forecast extrapolates current conditions — always a safe strategy.
P.S.: For sheer sophistry, it’s hard to top . . . surprise! . . . the strategy Goldman Sachs employs (or at least used to) with respect to forecasting stock prices.
Namely, its legion of analysts make every possible forecast under the sun.
Then, when one of the forecasts inevitably pans out, they loudly christen their new “star analyst” — and quietly reassign the ones whose forecasts were off.