Tuesday, 26 July 2016

Wrong Wrong Wrong

If there has been one party worse at forecasting rates than central banks it has been central bank watchers, actually we should add the markets though I would put the markets above economists in their forecasting ability. The winning trade for the past 18 months, longer in the case of the Fed, has been to fade expectation into rate announcements. 

Last BoE - Wrong. 
Last ECB - Wrong. 
Last few Feds re-direction of guidance (hawkish vs dovish) - Wrong. 
Last 2 BoJs - Wrong.

Even the Brexit outcome - Wrong. 
And the saddest forecast I think will be wrong - Trump will not be president. 

And while we are on wrong ‘uns -

China to kill the global economy in 2015 - Wrong. 
Greece to kill Europe - Wrong.
Deutsche Bank to sink Europe - Wrong.
Italian Banks (a perennial weed in the garden of economic disaster) to screw Europe - Wrong. 
Emerging market debt to screw the world - Wrong. 
Oil related High Yield to screw US markets - Wrong.
US stock markets collapse due to earnings - Wrong (new highs). 
Ukraine, remember Ukraine? No? Neither does the market.

Okokokok.. so maybe some of them WILL be right, one day, but if you count up the amount lost by 'five minute macro' on all of the above, you have to be in awe of their earning power to subsidise those losses. 

So why have they all been wrong? Basically for a couple of reasons

First reason - The power of negative interest rates has twisted economic behavior in ways that the textbooks couldn't predict. Putting a minus sign in the equations doesn't mean that behaviour does what you think. Elasticity and substitution, the two biggest Econ 1.0.1. fudge-factors, have had to be employed dramatically to explain why things aren't doing what they should do. The numbers head into another dimension, much as i, the square root of -1, invokes in maths. In economics, we head off in a direction that economists really aren't very good at predicting which is the ....

Second reason. Politics. When folk get annoyed enough about their standard of life they bypass economics and instead change the governing rules. If you change the rules of how business is done it can swamp any monetary inputs. Rich mill owner? Monetary economics really don't matter much if your workers put you in prison, steal half of your mill and smash up the rest. Political change is happening faster than anything monetary policy will be able to control. Rules will change and the allocation of wealth is not far from being decided by vote rather than the evolution of business. 

Economists are rubbish at predicting the rule changes. Even if they all think they should set the rules, 

And finally, as for the whole idea of printing money, it's amazing what you can do with a printing press. Caxton (the printer) should be given a posthumous Nobel prize for peace, economics (yeah, I  know technically there isn’t one) and physics for overcoming the first law of thermodynamics by proving perpetual motion can actually exist. Even if it is by monetarist example. 


Anonymous said...

J.S. Mill: "The laws and conditions of the Production of wealth partake of the character of physical truths. ... It is not so with the Distribution of wealth."

Point which economists repeatedly failed to get.

Anonymous said...

I hope your forecast is wrong