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Enjoy the spate of forecasts, but stay cynical [ClearOnMoney]
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Enjoy the spate of forecasts, but stay cynical

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Commentary

Enjoy the spate of forecasts, but stay cynical

20 Dec 2012 by Jim Fickett.

This is the time of year when almost everyone has an irrepressible urge to predict how the next year will go (in particular, where the S&P 500 will be in a year). Most of this activity is, of course, a waste of time, though there are a few good analytical insights here and there.

Here is an amusing comment on forecasting from Credit Suisse analyst James Sweeney, in the Credit Suisse 2013 Global Outlook (courtesy of FT Alphaville)

The great economist Paul Samuelson predicted in 1943 that the war’s end, with its collapse of military orders, millions of soldiers hitting the labor market, and “shift from astronomical deficits to even the large deficits of the thirties,” would usher in “the greatest period of unemployment and industrial dislocation” any economy has ever faced.

His classic mistake highlights the difficulties in forecasting socioeconomic outcomes at times when major new cyclical and secular forces are emerging.

Taking this experience into consideration, the modern forecaster can use wide scenario ranges as his ally, essentially admitting his ignorance.

Not to be too negative, I will say that while many of the forecasts in the Global Outlook can be safely ignored, it does contain a number of useful insights on specific topics.

For example, many people have noted that profit margins in the US are near long-term highs and will probably revert to the mean. Probably true, but Credit Suisse notes that two of the primary drivers of currently high margins, low cost of borrowing and low unit labor costs, are unlikely to change until the unemployment rate comes down and the Fed raises rates. Both events might be a long time coming. In other words, as usual, extreme situations can last longer than you might think.