Time to Make Wild Economic Predictions, They May Come True!
It's time for economic pundits to link bait the media with outlandish
predictions and make a name for themselves. It got its start with Elaine Garzarelli, a little known analyst made famous by predicting Black Monday, 1987.
Forecasters race to call the bottom of the market - NYT, 10/27/08
What's with oil and gold?
CNBC - oil analyst Peter Beutel - 10/27/08 Crude could hit $20/Barrel
Marketwatch - 3/7/08 - Goldman calls for $200/barrel oil
During oil's swift rise last spring, pundits were speculating that speculators were behind the bubble (but they weren't sure!). Now with hedge funds forced into selling oil (and gold, which explains the paradox of crashing gold prices during a global economic crisis), we now KNOW that oil was a speculative bubble. Once the hedge funds stop selling off due to redemptions, oil and gold prices will stabilize. The arguments that the crashing global economy will halt oil demand ring about as hollow as the previous argument justifying high oil prices because China's billions will all own cars soon. Conclusion - it's the hedge funds, stupid.
What's with the stock market?
We now know that hedge fund redemptions have significantly contributed to this month's market crash. Hedge funds manage institutional money; the Main Street investor is out of the market now because it's too volatile. Many pundits are saying the "bottom" will be reached when hedge fund redemptions end. Since institutional money is crashing the market, what's possible when the credit markets ease, the markets start looking stable AND every central bank in the world is doing everything possible to stimulate the global economy. Wouldn't institutions come back into the market with their cash ? Remember, institutional money can be moved more massively and opportunistically than your or my IRA.
The point is almost nobody predicted oil prices would go up and down as they did in 2008, and very few predicted this October surprise crash. Who can really predict what will happen with all that institutional cash and sovereign cash (and there are bucketloads) sitting on the sidelines? Very few are predicting a rebound... I could only find one economist team that has. On the other hand, depressing editorials in the NYT these days are the norm.
Forecasters race to call the bottom of the market - NYT, 10/27/08
“To make a crazy forecast today is not crazy,” said Owen Lamont, a former professor at Yale who has studied economic forecasting. “It’s not crazy to predict the Dow is going to 2,000. That’s in the realm of possibility.”Dow 36,000 - a book by James Glassman and Ken Hassett in 1999 before the dot-com bubble burst. Getting the prediction wrong doesn't seem to hurt careers. Hassett became economic adviser for McCain's Presidential Campaign in September 2008.
Even in normal times, forecasters have a strong incentive to make extreme predictions, which is why those “Dow 1,000!” reports persist. “It’s eye-popping. It’s relevant. It seems exciting,” Mr. Lamont said. Such predictions attract publicity, name recognition and a bigger client base in a business where investors pay thousands, if not millions, for stock advice and investment guidance.
What's with oil and gold?
CNBC - oil analyst Peter Beutel - 10/27/08 Crude could hit $20/Barrel
Marketwatch - 3/7/08 - Goldman calls for $200/barrel oil
During oil's swift rise last spring, pundits were speculating that speculators were behind the bubble (but they weren't sure!). Now with hedge funds forced into selling oil (and gold, which explains the paradox of crashing gold prices during a global economic crisis), we now KNOW that oil was a speculative bubble. Once the hedge funds stop selling off due to redemptions, oil and gold prices will stabilize. The arguments that the crashing global economy will halt oil demand ring about as hollow as the previous argument justifying high oil prices because China's billions will all own cars soon. Conclusion - it's the hedge funds, stupid.
What's with the stock market?
We now know that hedge fund redemptions have significantly contributed to this month's market crash. Hedge funds manage institutional money; the Main Street investor is out of the market now because it's too volatile. Many pundits are saying the "bottom" will be reached when hedge fund redemptions end. Since institutional money is crashing the market, what's possible when the credit markets ease, the markets start looking stable AND every central bank in the world is doing everything possible to stimulate the global economy. Wouldn't institutions come back into the market with their cash ? Remember, institutional money can be moved more massively and opportunistically than your or my IRA.
Conclusion: Expect the UnexpectedNational Bank's monthly Equity Monitor refers to earlier IMF studies showing banking-led financial downturns last an average of 23 months. Using the same method, National Bank found that equities fell 43% from peak to trough over six such periods of severe financial stress. Since two Bear Stearns hedge funds collapsed 15 months ago, the S&P 500 has already matched that level of decline.
After these episodes, "the rebound is usually steep. In six comparable periods of major financial stress, equities gained an average 48% within six months of their bottom and a whopping 86% within a year," Mr. Lapointe said.
The point is almost nobody predicted oil prices would go up and down as they did in 2008, and very few predicted this October surprise crash. Who can really predict what will happen with all that institutional cash and sovereign cash (and there are bucketloads) sitting on the sidelines? Very few are predicting a rebound... I could only find one economist team that has. On the other hand, depressing editorials in the NYT these days are the norm.
Interesting post Pat. One thing for sure, unintended consequences created cataclysmic unpredictability and historical perspective is useless. This is all new ground, impacted by unprecedented US and world wide government involvement. Let's hope that balance, a sense of stability and confidence returns.
Thanks for the post.
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Hi,
I read your blog it is informative and full of information.
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Great post, especially "Who can really predict what will happen...?" No one. But what we can do to keep it positive is to look ahead and try to make our best of every situations. Thanks!
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Who could have predicted this Dow +889 day? It seems arbitrary... consumer confidence was reported at an all time low, but the extraordinary yen weakened, and like a butterfly in a Brazilian storm, the market takes off...
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Hey Pat,
Nice post that makes you think. So.. what do you think about the global demand for oil going down so much in September?
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That whole oil bubble this summer was driven by hedge funds... now oil prices seem to be reflecting where they should be at. Wouldn't you think that demand for oil would remain fairly constant given the assumption that there is oil supply, and we're not in the last days of oil extinction?
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Pat,
We know about the market influences that drove oil prices up but the actual demand for oil had a pretty big drop in September. I'm not commenting on prices but actual consumption / use of oil in September that had quite a decline.
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I'm glad to see the public become conservation conscious due to that oil spike. Latest news from FT along with today's oil price rise based on a weakening dollar suggest that oil could go higher again.
Note that the Dow dropped 400 points in the final 10 minutes of trading today because GE's Immelt announced a readjustment to GE's 2009 profit outlook. Any little piece of bad news can swamp this overly sensitive market.
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Excellent content - as you always provide and inspires me to come again and again. You are on my RSS reader now so I can read more from you down the road.
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