Thursday January 5, 2006 - 11:48:04 GMT
Share This Story
Black Swan Capital - www.blackswantrading.com
Folly of forecasts
“Looking forward, our euro area team expects GDP growth to accelerate above 2% this year. Although still modest, this would make it the best year since 2000. The two lessons I took from last year make me relatively confident about our GDP growth call for 2006. As I see it, the two main exogenous downside risks to our call are, first, a belated but significant depreciation of the US dollar and, second, an unexpected slowdown in American and Chinese domestic demand. In each case, there are other macro variables that would mitigate the shock. If, for instance, the USD depreciated against the euro in the coming months, interest rates would not rise as much as we are currently discounting. In a first stage, manufacturing surveys would react negatively to currency developments but, in a second one, interest rates would have the upper hand. If the two engines of global growth since 2002, the US and China, failed to feed global trade growth, commodity prices would drop, offering the equivalent of a tax cut to both consumers and companies. Last but not least, the lagged impact of zero real short term rates would continue to support final domestic demand, the fundamental variable that really matters in the euro area.”
Erich Chaney, Morgan Stanley
Reading the perennial annual “forecasts” from a hosts of different players (and we again plead guilty as charged), it got us thinking about the folly of such events. And our simple succinct commentary today goes to that point—we hope.
The future doesn’t always resemble the past no matter how much we want it too. In our real life we know that. Yet in our financial life—in the world where Gaussian bell curves and random walks give way to irrationality and meandering price dependency—often we are lulled into an expectation that yes, the future will resemble the past. It is quite a paradox. Yet we continue to make predictions that form our expectations leading to surprise which in turn moves prices. It’s the way it is and seemingly has to be, otherwise prices might rest at equilibrium and that would take all the fun out it.
“Learn everything you can, collect all the data, crunch all the numbers before making a prediction or financial forecast. Even then, accept and understand that nobody can predict the future when people are involved. Human behavior hasn’t changed; people are unpredictable. If you’re wrong, correct your mistake and move on.”
So we collect, crunch, and guess. That is our lot. It is all we can do. It is the best we can do. But it doesn’t seem good enough for most of us. So we dress it up with important sounding words such as analysis, scenarios, outcomes, correlations, etc. on into word-game infinitum in the spirit of perceived wisdom.
“Against this panorama of nations, morals, and religions rising and falling, the idea of progress finds itself in dubious shape. Is it only the vain and traditional boast of each ‘modern’ generation? Since we have admitted no substantial change in man’s nature during historic times, all technological advances will have to be written off as merely new means of achieving old ends—the acquisition of goods, the pursuit of the one sex by the other (or by the same), the overcoming of competition, the fighting of wars. One of the discouraging discoveries of our disillusioning century is that science is neutral: it will kill for us as readily as it will heal, and will destroy for us more readily than it can build. How inadequate now seems the proud motto of Francis Bacon, ‘Knowledge is power’! Sometimes we feel that the Middle Ages and the Renaissance, which stressed mythology and art rather than science and power, may have been wiser than we, who repeatedly enlarge our instrumentalities without improving our purposes.”
Will and Ariel Durrant, The Lessons of History
And so it goes! Tomorrow we get a look at the US jobs report for December. Today, we see a bit of backing and filling after a wicked two-day siesta for the buck. Stay tuned.
Black Swan Capital
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."