Monday, January 19, 2015

It’s prognostication season

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Every January, pundits put on their Janus masks to look back and forward at the same time and make predictions about the year to come. They try to give their words as much gravity as they can, but if we look at history, we see they’re somewhat less reliable than the weather.
Some of the most prominent, and repeated predictions I have read for this year:
  • Interest rates will finally go up after a decade at near zero. The prevailing prediction is that the Federal Reserve, the central bank of the US, will raise its rates in the second quarter—but maybe sooner, depending on the performance of the US economy—which will prompt the Bank of Canada to move its rate up at its regular rate-setting, which it hasn’t done for the past 34 rate-setting meetings, or seven years. I have lost count of the number of times some economist or pundit has predicted that “interest rates have to go up sooner or later.”

  • On the other hand, big, bad investment bank Morgan Stanley has just announced there’s a “subjective probability of one in three that the Bank of Canada cuts interest rates in 2015. That terminology is interesting: a “subjective probability.” The closest translation to clear language I can come up with is it’s the writer’s personal feeling.

  • Oil prices may keep falling and there’s no telling when they’ll stop. Over the past couple of months, we’ve been treated to successive economists in expensive suits saying “if the price of a barrel of crude goes below $80—$70—$60…” It’s now under $50, and the latest prediction is that the floor will be $43 before prices start to go up again. Of course, this comes from the same expensive suits, Morgan Stanley, who put forth their “subjective probability” about Canadian interest rates.

The falling price of oil will have far-reaching effects on economies around the world. In Canada, the conservative government has delayed its budget for at least a month to give it more time to “gather data.” This after eight years of betting the economy on oil and other raw resource extraction industries, at the expense of manufacturing industries. Talk about all your eggs in one basket. 

How is it they didn’t see this coming?

Economists have poor track record when it comes to short-range predictions, especially for the coming year. The price of oil is the best example. It has followed a classic bubble pattern: a steep rise followed by steeper decline. It’s happened so many times in the past, in so many other sectors, that it astounds me that no one saw this coming.

Predictions? Maybe they’re useless, when it comes to the economy. From now on, when I read another prediction about the economy, I’m just going to laugh.


  1. Anonymous12:55 PM

    I am goig to laugh along with you, Scott!

    Onisha Ellis

  2. Oil pricing here in the USA is a shell game, at best. One time they tell us we buy our oil from overseas and that is why the cost escalates. Next time, there is a storm or oil rig spill off the coast of America and gas prices go up. Hmm? Why is that if we buy overseas? I'm amazed (and it might be true) that somebody in Congress farts and gas prices incline, yet again. One can attempt to see the future but I fear it is - as you have stated by quoting - subjective probability - and the only one who seems to win is the other guy. I'm always left holding the crumbling cookie. I see in the future the good (innocent) guy will get screwed. Not subjective, but a definite probability. Invest in taxes, they're going up.

  3. Falling oil prices helps me personally, but I imagine that families that are dependant on the energy companies for their livelihood are hoping for a different outcome.

  4. I can never predict anything and know I can only be responsible for myself. I wish I could predict things - and maybe I would stop wasting my time learning things that will have no impact on my future.

  5. Your post reminds me of the old saying that if you laid all of the economists in the world out head-to-foot, they still would not reach a conclusion.