Sunday, May 17, 2009

The Fools of Forecasting

Bull-minded friends have been claiming that this is turning out to be a V-shaped recession - fast in, fast out. They may be right. Knowing nothing of the future, I am not qualified to comment. However, speaking only of the past, one can't help be struck by the elegant analysis of John Authers in the FT.
'In the short term, the past months show us, it is earnings forecasts that drive markets. This is awkward, because the past year should also have taught us not to place any trust whatsoever in the collective wisdom of the analysts brokers employ to forecast earnings.'
Last July the brokers' hotshots were forecasting a rise of one third in corporate earnings in the first quarter of this year. They fell by a third. Analysts were fantastically slow to adjust their forecasts in the light of events. When they finally did, they just threw up their hands in horror. As a result, when the companies started reporting the stock markets rallied because, bad as the figures were, they weren't quite as bad as the monsters stalking the demoralised hotshots' imaginations.
Financial forecasting is a dangerous, stupid business, nobody should waste their intelligence on such a futile and dishonest activity. Yet it appears to rule our lives and, I predict, it will continue to do so.

1 comment:

  1. This is you at your silliest. Please explain how you expect the economy to function if nobody forms any expectations about the future? Or perhaps you can explain the difference between forming expectations about the economy, and making dangerous and futile financial forecasts.

    Can you explain how the stock market would function more effectively if none of its participants had any idea how much money any of the listed companies might make in coming years?