The Problem with Gloomy Forecasts

The Bureau of Meteorology (BOM) put out an unprecedented statewide alert in Victoria on Thursday.

Biblical scale rains were coming.

The media was in a frenzy.

Every channel had blanket coverage of the coming storm.

A storm which would be ‘the likes of which half the people in Victoria have never witnessed before’ according to one gushing newspaper.

But what happened?

Well I woke up on Friday morning and looked out the window. I live on Melbourne’s Maribyrnong River so I visually checked the water level against the bank.

Nothing out of the ordinary so far…

I looked up at the sky. Cloudy, a bit of drizzle. But no torrents of rain yet.

I checked the news. The storm was still on its way, they assured me.

‘Storms expected at Friday lunchtime, batten down the hatches, leave work early…’

Friday came and went.

A bit of rain but nothing that you wouldn’t see on a Scottish winter’s day. Even a Scottish summer’s day…

Again, I checked the news sites.

One months’ rain due to fall in next 24 hours’. Saturday afternoon was the new deadline.

Saturday afternoon came along. Dreary weather for sure, but Armageddon? No, not quite.

Once more I checked the news sites.

The BOM was worried…

My favourite headline was the slightly defensive one that ran on The Age website…

‘Weather event going exactly as predicted says the BOM’

‘A bit of drizzle and some cloud?’ I thought.

It looked like being a fizzer.

Then on Saturday night finally the promised sheets of rain arrived. It rained pretty hard, and roads started to flood.

I imagined a wave of relief sweeping the BOM offices…

Now this is clearly a parochial viewpoint. Those up in Myrtleford and North-East Victoria copped it a lot harder than in the city.

And I’m certainly not criticising the BOM’s warnings. It’s better to prepare for the worst and hope for the best than the other way around.

In investing that’s true too.

They probably saved lives by issuing the warnings in the first place. People were prepared, so less problems occurred.

But it did make me think about the problem with forecasting.

Especially when you’re dealing with complex systems like the weather.

Or even more complex systems like human behaviour. Financially this is the field of economic forecasting. 

Every segment is booming

Economic forecasters are a brave brunch.

Like the weathermen, they are damned if they do and damned if they don’t.

And economically speaking right now, we have a similar situation to the weekend’s weather. A massive dark cloud is upon us. It could wreak havoc.

The economists can see it clear as day.

But like the storms over the weekend, predicting exactly where and when the problems will surface is the tricky part.

And at the same time, despite this, pretty much every market segment is booming.

How can that be?

Let me explain…

Check out this chart:

St. Louis Adjusted Monetary Base 04-12-2017

Source: St Louis Fed
[Click to enlarge]

What do you think it shows?

Bitcoin’s exponential rise?


It’s actually a chart that reflects the increasing level of money printing in the US.

Look at all those dollars created after the GFC in 2008. Money created out of thin air!

And that’s only half the story.

Thanks to fractional reserve banking, commercial banks can lend out multiples of money deposited with the Fed.

What happens when you make more of something? Well as you know, if supply goes up — all things being equal — prices (value) go down.

At the same time, where are all these dollars going? They have to go somewhere.

In theory they are meant to go into productive assets. Loans to businesses and the like. Then the economy will grow through this investment surge.

But that’s not what’s happening

Instead this money has simply found its way into assets like shares and property. In fact, it’s going everywhere, creating the simultaneous booms we are seeing in every market. All at the same time.

Consider this…

Where’s all the cash going?

In 2017 US stock buybacks by major companies broke new records. This is companies using company cash to prop up their own share prices.

Goldman Sachs Chief US Equity Strategist David Kostin and his team estimate that S&P 500 buyback spending will total $780 billion in 2017. That would be more than their estimate for $602 billion in 2016, which was the previous record.

This asset price inflation is great if you already own assets like shares and property.

And it’s great for executive bonuses which are often ties to share prices.

But it’s not good for anyone on a wage, without these assets. They’re get paid in increasingly worthless cash, while at the same time assets as simple as a home are getting out of reach.

And to add insult to injury, wage growth is also stagnant. It’s a triple blow for an increasingly large segment of the population.

It’s not sustainable over time. If creating national wealth was as simple as printing money and inflating assets, then the game of economics would be easy.

The simple fact is at one point you’ve got to pay the piper.

And I think at one stage this almighty dark cloud will eventually unleash an economic storm.

But be wary of believing forecasts of when this will be. Complex systems have a habit of defying predictions. And the storms that cause the real damage generally hit when you least expect them.

Good Investing,

Ryan Dinse,
Editor, Money Morning

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia