In an excellent essay published over the past week, GMO'S James Montier
of the consistent weakness embodied in consensus forecasts.
Attempting to invest on the back of economic forecasts is an exercise in extreme folly, even in normal times. Economists are probably the one group who make astrologers look like professionals when it comes to telling the future. Even a cursory glance at Exhibit 4 reveals that economists are simply useless when it comes to forecasting. They have missed every recession in the last four decades! And it isn't just growth that economists can't forecast: it's also inflation, bond yields, and pretty much everything else. If we add greater uncertainty, as reflected by the distribution of the new normal, to the mix, then the difficulty of investing based upon economic forecasts is likely to be squared!
For 2011, consensus estimates for economic growth, corporate profits, stock-price targets and interest rates are grouped in an extraordinarily tight range. I have chosen to use
Goldman Sachs' forecasts
as a proxy for the consensus.
Here are Goldman Sachs' principal views of expected economic growth, corporate profits, inflation, interest rates and stock market performance:
- 2011 GDP up 3.4% (global GDP up 4.7%);
- 2011 S&P 500 operating profits of $94 a share;
- year-end S&P 500 price target at 1450 (a gain of about 15%) ;
- 2011 inflation of 0.5%; and
- the 2011 closing yield on the 10-year Treasury note at 3.75%.
Looking beyond 2011, it appears that the consensus further expects that the domestic economy is well on its way toward delivering a smooth, self-sustaining and normal historical recovery that (from start to finish) should last about four years. The clustering of that consensus suggests that any short- or intermediate-term variant outcomes could be destabilizing to the markets, both to the upside and to the downside.
To some degree, my surprises for 2011 attack some of the similar, nonvariant and nearly universally optimistic expectations on the part of money managers, strategists, economists and members of the fourth estate. As such, I want to emphasize that my intention is not to be a Cassandra or to be a contrarian for contrary's sake but rather to recognize that most prefer the dreams of the future to the history of the past.
My surprise list for 2011 recognizes an often repeated lesson of history: What seems easy for (bullish) investors to imagine today might prove more difficult to deliver, as prospect is often better than possession.
More than almost any time I can remember, there exists few variant views relative to consensus as we enter the New Year. Perhaps leading that minority is Gluskin Sheff's David Rosenberg, who, though thoughtful and thorough in analysis, is pigeonholed by the media as a dogmatic standard-bearer for the bear case. (Gluskin Sheff's David Rosenberg succinctly
underscores and questions
the universal optimism in his commentary this week.)
"Those who cannot remember the past are condemned to repeat it."
-- George Santayana
Looking at history, there was no better example of misplaced optimism than in the period leading up to the Great Decession of 2008-2009, providing a vivid reminder of the poor forecasting ability and investment risks associated with the crowd's baseline expectations and the value of a surprise list that deviates from that consensus.