Forecasting and its discontents
“Prediction is very difficult, especially if it’s about the future,” is attributed to a long list of people. Even with that in mind, however, the first eight months of 2010 have been especially unkind to professional forecasters and investors as markets have lurched between extremes of pessimism and optimism.
Normally forecasters can benefit from diversification — publishing lots of forecasts ensures at least some prove correct. But heightened correlation between and within asset classes has denied forecasters and investors even that consolation.
Federal Reserve Chairman Ben Bernanke has complained about the “unusual uncertainty” clouding the outlook. And macro hedge funds have run into trouble, several prominent ones closing down and returning money to investors, as the big trends on which they thrive have disappeared amid volatility and sharp switchbacks.
The only clear trend has been the rush towards the safety of high-rated government bonds and corporate debt. Even that has some observers muttering darkly about irrationality and the probability of a bubble, implying a big reversal in future.
In that context, it is hardly surprising oil price predictions have come unstuck.
The median forecast for average U.S. crude oil prices in 2010 increased steadily from $74.00 per barrel in the first Reuters survey in October 2009 to $81.06 at the time of the April 2010 survey, before sliding in each of the next four months to a low of $78.63 in August. Further reductions seem likely when the next survey is published in September.
While the adjustments may not seem large, these are averages. Changes in individual predictions have been far larger in some cases.
Similar revisions are apparent in forecasts for 2011. Predictions rose steadily from $81.30 to a peak of $87.53 in April before retreating to $83.84 by August in line with faltering spot prices.
Rather than leading the market, forecasters have been left following it. Predictions have proved adaptive rather than forward-looking.
FORECASTS GO WRONG
Oil analysts are not the only ones with a prediction problem. Earlier this month the “Financial Times” published an audit of the Bank of England’s inflation and growth forecasts that showed they have been systematically biased and “contain little useful information”.
“Despite having hundreds of economists working in the Bank, and the most sophisticated suite of economic models in the UK, the monetary policy committee’s forecasts since 1997 have achieved no better outcome than if the committee had simply predicted the average level for inflation and growth over the 13-year period,” according to the FT.
“The MPC puts a wide margin of error around [its forecasts] … That leeway is now wider than the normal variability of growth and inflation … meaning that it is almost impossible for the forecasts to be wrong.”
In that respect, the MPC’s projections have become a bit like utterances of the ancient oracles: vague enough to cover most eventualities. But forecasts produced by the Federal Reserve have not held up any better, and the battle between inflationists and deflationists continues to rage inconclusively.