Dirty business of forecasting

Forecasting is a dirty business. The problem is not that one can’t have strong basis to be able to make predictions. On the contrary, quite a few long term forecasts need only common sense. But forecasting is dirty because the subject of forecast may not be amenable to reason. That is especially true for financial markets.

One and half years ago I wrote a post about subprime mortgage crisis which began with “This is getting serious” and described the impending crisis. The post ended with ominous lines “If it goes like this we can see a synchronized meltdown here too. Keep watching as the drama unfolds”.

And Mr Market said “to hell with you” and continued its climb. Sensex rose from 12529 to 17302 in next six months.

I was amazed. I looked at the valuations and decided enough is enough. It doesn’t make sense. I wrote a post painting the doomsday scenario that you saw unfolding last week. I didn’t hedge my bets. I wrote “I'm not reading out from pages of financial history. I'm writing about a not so far future, (before the end of year) when we are going to see a 1000 point drop in Sensex almost without a reason. The reasons will be invented later but if look carefully the reasons are being present now”. In the theatrical style I concluded the post “On the eve of that Black day, the high-flyer portfolio manager will come home and say ‘You were right dad’” [about Fixed Depsoits]

In few days market rose a thousand points. I got an email from one of the readers which read this.
Subject: Congratulations
Congratulations on the excellent forecast. You were right about 1000 points, just the sign was opposite.
The markets were no less brutal and Sensex touched a peak of 21,206 within weeks.

The reluctant forecaster thought of retiring from the dirty business. Its true. I really don’t want to make prediction but sometimes I succumb to the irresistible lure of the sin. I’m not paid to make forecast by any company. I’m not a celebrity whose reputation rises and falls with the crystal gazing capability. When I make forecasts, I do because I feel an urgent sense to act. I’m just verbalizing my own ideas. Unlike most analysts, I bet my ass on my forecasts. I don’t mince words. I don’t hedge my bets.

Four months ago when oil prices crossed $135 per barrel, most people were talking about oil at $200. People were referring all sorts of demand and supply data along with half cooked analysis of geopolitical equations to support that hypothesis. I was amazed that so many brilliant people were busy charting not only the price level but the route the prices will take to that point. Some will say it will have minor correction to $120 before shooting like a rocket to $200. If you could keep your mind away from all this, it was quite evident that the high oil prices had begun to pinch the consumers badly.

In June 2008, I wrote about oil - “As we talk about the 200$ oil, I'm getting signals which suggest that oil may surprise people once more. It may correct to as low as 70-80$ per barrel in coming 12 months. However by this time the damage would have been done and the economies of the world would have shaved 2-3% in their GDP growth rates.”

Oil has plunged below $78, market has plunged below 11000, subprime was nominated “word of the year, 2007” by American Dialect Society and dirtiest word of the year, 2008 by global investors.

I can sit back and relax like python..wait for the prey to come near the water mark and make my kill. If you are a python, you need just one kill to sustain for next 6 months.

Life is beautiful.. Forecasting?...as dirty as usual.


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