A key element for investors is knowing what has already been discounted by the market -- "baked in" to use the current vernacular. Think about TV and radio commercials suggesting that investors buy gasoline futures at the start of the summer, as if markets did not already reflect summer driving.
If one wants to play for a recession, it must be something that is not already reflected in market prices, showing some insight that most do not see. When it hits the cover of Time it is too late.
So what about a recession based upon the decline in housing, the Fed, twin deficits, or other factors. There is a choice. One can look at consensus forecasts, concluding that the professional economists have ignored these factors, even though their recession odds have moved. Maybe they are biased or not doing their jobs well, so one should look to extreme predictions.
After seeing the dour Nouriel Roubini on CNBC for the umpteenth time in the last two weeks, it started to look like a cover of Time. Who had not heard about this? I turned off the "mute" button and listened to his explanation of why he thought he was better than all of the other economists. He emphasizes how they missed the downturn in 2001. We need to ask whether that is systemic or an aberration.
Roubini says that forecasters are optimists and offers this 2000 IMF working paper as evidence. Since most will not read the entire paper, let us highlight the key point -- the data used. The conclusions are based upon forecasts for developing and industrialized companies from 1989 to 1998. Here is a table showing the cases used (click to enlarge):
I leave it to the reader to decide whether this information from economists covering the many developing countries is relevant to current forecasting of the U.S. and global economies. Please note that there is a single (Count 'em -- ONE) U.S. exampe. I recommend reading our prior analysis of economic forecasting from top sources here and here.
Since active market participants are well aware of the views of Roubini (and Doug Kass, and housing blogs), and stocks sensitive to economic growth have been crushed since mid-May, one may well question what is the real contrarian view.
Comments