At least I don’t have to pretend anymore

So anyway there I was listening to Morning Ireland, and this chap, who used to be big name in the ESRI, giving their highly thought of views every quarter, garnering acres of media coverage and attention, but now he’s saying “I’m not in the forecasting business anymore so I don’t have to pretend that I have a great sense of what’s actually going to happen”

 

Pretend!

 

He never mentioned the word pretend when he was handing down the pronouncements of the great and the good in the economic community. Forecasting GDP growth and its components to a decimal point seemed to carry an air of (self) importance that didn’t entertain the concept of pretending. Nor was there ever use of phrases like “ we were wrong”; no – people simply revised their initial assumptions! If you’re interested have a look at the ESRI Medium Term 2005-2012 Review and see how closely it captured the outcome.

 

I don’t pay huge attention to economic forecasts. If the economic growth outcome is 2.1% or 2.5% doesn’t really make that much difference in the investment world. Pay more attention to things like whether growth is running ahead or below potential.

And it’s not just that we can’t forecast the future, we don’t even know where we are today. Historic economic data gets revised and rebased often and sometimes in a very material way.

So should we pay these forecasts so much heed when the task seems akin to Rowan Atkinson’s description of the blind man in the darkened room looking for the black cat that isn’t there.

And it’s not just me who questions the usefulness of the effort. Elizabeth Windsor ( HRH Queen Elizabeth II, see above) put it to the highly regarded economists at the London School of Economics following the great financial crash “well lads, yis missed that one” (I para-phrased that somewhat).

 

Investors shouldn’t spend a lot of time or effort on forecasts which will most likely be wrong. Time is better spent looking for well managed companies generating good returns on capital and good cash flow. I read of a fund manager, many years ago now, who abandoned macro-economic forecasting in his investment process altogether – and did very well indeed. His name was JM Keynes.

He probably knew a thing or two