I love Santa Fe in New Mexico, and would like to move there and buy a pick-up truck; I have never even visited Santa Fe, nor have I ever owned or driven a pick-up truck.
If this sounds crazy or abnormal, then a lot of the stuff I observe in my profession is even worse.
Forecasting prices of securities, economic statistics and political scenarios is done with great effort on a daily basis. Many of us demand predictions because we fear uncertainty and hope that the better educated among us can give us a hand with their crystal balls. Yet we know forecasting is essentially useless because it is very inaccurate – worse than flipping a coin and going with the outcome. Maybe we keep looking for them so that we may assign the blame for our mistakes to someone else.
Besides, forecasting is more often than not a description of normality: most forecasters attempt to predict the possible path of events in the middle, not at the extremes. When is the last time anyone has forecast a recession or a severe market disturbance (positive or negative)? Occasionally someone comes out with an improbable view, gets it right, perhaps is hailed a “guru”, and proceeds living off that single utterance for years and decades thereafter.
And what can we say, once more, of the case where most “investors” and “research shops” still assign value to companies on the basis of one year’s worth of earnings? Are those single-period accounts really reasonably representative of a multi-cycle, very long stream of cash flows?
Another intriguing phenomenon is the success and persistence of momentum in market prices despite several years of confirming research. Could the explanation lie somewhere in this picture?
For lack of rationality look no further than the hullabaloo regarding ETFs and their impact on market participants’ behavior. Some have claimed that when volatility returns to the markets it will be enhanced by large swings in investor sentiment and the associated selling pressure. But what about the world before ETFs and the fact that most “active” managers are index-huggers? Wouldn’t sentiment and selling pressure also engender large swings in prices under those circumstances?
Yes, I know: journalists and reporters need a job too, they have kids to feed and shoes to buy. But what are we to make of all the daily commenting on events and rationales for market movements? Often those same rationales are happily recycled a few days later to explain market changes in the opposite direction. If there is a surprise here it is the amount of creativity generated in attempting to explain randomness.
Lastly, how could I miss pointing to the latest salvo from the Trump administration with its new immigration policy? To revive long term growth, you need to expand population and productivity; if the proposed immigration restrictions are enacted one of these two variables will actually decline.
I think I’ll keep planning my move to Santa Fe.