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It’s a Tough Call on Just Which 'Experts' to Believe

By    |   Thursday, 30 Dec 2010 01:00 PM

With the year coming to a close, a lot of people try to sound smart by predicting what will happen next year.

Bloomberg recently had an article with a list of all the large banks forecasts’ for where Treasury yields will be at the end of 2011.

The article, as a side point, also noted the forecasts these same banks made just one year ago. Some of the most reputable (and I use the term loosely) banks had very high expectations at the end of 2009 for what would become of Treasury yields in 2010. Many firms predicted the 10-year notes would end up over 4 percent at the end of 2010. Morgan Stanley predicted the 10 year would end up near the 5.5 percent mark.

As the year comes to a close, the yield on the 10-year is 3.35 percent.
Morgan Stanley, which was so wrong with its prediction, is now forecasting that by the end of next year, the 10-year notes will be hitting somewhere close to 4 percent. Morgan Stanley certainly did come down a bit, but what gives us reason to trust its prediction this time?

James Caron, Morgan Stanley’s head of U.S. interest-rate strategy, is the one responsible for the estimates of around 4 percent next year. He also is the one who said in August that Morgan Stanley had estimated last year’s numbers too high.

One could attribute some of the forecasts as being a bit too high to the fact that the economy’s rebound was slowing. But when you look at the entire picture, the economy has continued to slowly rise throughout 2010. Despite the early year slowdown, the S&P will end the year with a gain of more than 10 percent (barring a Black Swan event).

How can it be that the same individuals and institutions — which were completely off about what the market would do — not only get to continue making predictions but get to do so while affecting investors across the board?

If a weather forecaster on your local news channel gets the temperature off by a few degrees, that’s one thing — but if he calls for a hot, sunny day and you see snow out of your window … would you believe them after that?

Yet these so-called expert analysts continue to issue statements to the financial world about what will happen when they had just issued statements on why they were so wrong only four months earlier.

It isn't only the banks which are wrong — or that they are wrong only when it comes to Treasury yields.

“Expert” forecasts for what will happen in the future tend to be wildly off the mark. This is true in every field but especially true in finance.

So whether it is your brother-in-law telling you gold will shoot up to $3,000 an ounce, or your stockbroker telling you Chinese stocks will surge 50 percent, or predictions that the S&P will gain 10 percent next year — take everything with a large grain of salt.

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Wolinsky
With the year coming to a close, a lot of people try to sound smart by predicting what will happen next year. Bloomberg recently had an article with a list of all the large banks forecasts for where Treasury yields will be at the end of 2011. The article, as a side...
jacob,wolinsky,
502
2010-00-30
Thursday, 30 Dec 2010 01:00 PM
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