Forecasting Follies 2018

The Philadelphia Eagles won the Super Bowl last January by defeating Bill Belichick, Tom Brady and the New England Patriots. They were coached by Doug Pederson, a remarkable young leader in just his second season as head coach, whose aggressive style and forward-thinking approach, driven by analytics, led the Eagles to their first Super Bowl championship ever. Pederson’s leadership style is epitomized by his daring fourth down goal line call just before halftime of the championship match-up.

Quarterback Nick Foles set up in shotgun formation and moved down the line of scrimmage to his right, talking to his linemen in hopes the defense wouldn’t be set when the ball was snapped. Running back Corey Clement took a direct snap, moved left, then flipped the ball to Trey Burton on a reverse. Rather than running the ball, Burton flipped a pass to an uncovered Foles, who had leaked out toward the end zone. Touchdown, Eagles. Foles became the first quarterback to throw and catch a touchdown in the Super Bowl, and Pederson’s reputation as an aggressive and successful play-caller became legendary.

Yet another fourth down conversion late in the fourth quarter kept a drive alive and allowed the Eagles to score what would become the game-winning touchdown.

Doug Pederson. Innovator. Super Bowl winner. Great coach.

Two years earlier, Doug Pederson was a punch line.

Pederson was one of seven NFL head coaches hired before the 2016 season. NBC Sports began its coverage of the Pederson hiring with, “Well, that was a mess” and called it “high comedy.”  Deadspin called him an “outlet store version” of one-time Eagles coach Andy Reid. NJ.com predicted that the Eagles would fade into obscurity, with no Super Bowl “in sight.” Long-time NFL executive Mike Lombardi was highly critical of Pederson. ”Everybody knows Pederson isn’t a head coach,” Lombardi said. “He might be less qualified to coach a team than anyone I’ve ever seen in my 30-plus years in the NFL.”*

USA Today called Pederson a “blergh hire” (really) and sarcastically mocked the Eagles’ choice, ranking it the worst of the new hires. Bleacher Report had him dead last among the new hires too. Athlon had one hire as worse than Philadelphia’s, but gave the Eagles a grade of D for choosing Pederson. Chat Sports also had Pederson’s hiring as sixth best out of seven, praising the pick as “not a terrible hire.” CBS Sports had Pederson second-to-last as well, but at least offered a C+ grade. NFL.com was more optimistic, ranking him fifth out of seven. Not to be outdone, Pederson was adjudged by ESPN to be the worst head coaching hire of 2016.

The six geniuses ranked ahead of the Super Bowl champion?

Gone. Terminated. Fired.

ESPN had Hue Jackson of Cleveland as the best 2016 coaching hire. Jackson won just three of his 40 games in charge, before the was fired. Chip Kelly was next. He was jettisoned after one season in San Francisco and just two wins. Only one of the 2016 hires other than Pederson compiled a winning record and all were fired within three years. The “worst” choice was the only one to remain employed…and he also won the Super Bowl.

Prediction is obviously dangerous business because we humans are so bad at it. And the proof that we’re bad at it is astonishingly easy to find. Fox News pundit Laura Ingraham predicted that, “Our economic news is only going to get brighter in 2018.” President Trump predicted a “red wave” (more accurately, a “RED WAVE”) in the 2018 elections. Newt Gingerich did too. Multiple parties (including Bill Mitchell, Glenn Beck, Steve Bannon, and Rudy Giuliani) predicted a swift end to the Mueller investigation with the president’s innocence established.

Not to be outdone, Democratic pundit Scott Dworkin predicted that Vice President Mike Pence and President Trump would leave office by the end of 2017, paving the way for Speaker Paul Ryan to become president. Then, in 2018, Republicans would lose the House (they did) and Senate (they didn’t), at which point, President Ryan would be impeached. And HuffPost congressional reporter Matt Fuller predicted that Joe Cowley would become Speaker of the House. Cowley ended up losing a primary fight with unknown newcomer Alexandria Ocasio-Cortez and couldn’t even hang on to his House seat, much less move up in House leadership. President Trump’s former ghostwriter predicted that the president would resign in 2017…and 2018. Michael Avenatti predicted that Donald Trump, Jr. would be indicted in 2018.

In late 2017, antivirus mogul John McAfee tweeted confidently that “BITCOIN is still the crypto giant. It is at a low price, and will never be cheaper. It will be ten times this price in 2018.” Instead of advancing ten times, over the year it dropped more than 80 percent. At the beginning of 2018, then New York Attorney General Eric Schneiderman solemnly vowed to continue to protect the safety and well-being of all New Yorkers. It remains unclear if he meant to include the four women who accused him of sexual and physical abuse shortly thereafter, leading to his resignation in May. President Trump tweeted in December 2017, just over a year ago, “I predict we will start working with the Democrats in a Bipartisan fashion.”

Of course, financial and market prognostications are always among the worst of the lot. As the legendary investor Benjamin Graham wrote, “Nearly everyone interested in common stocks wants to be told by someone else what he thinks the market is going to do. The demand being there, it must be supplied.”

Michael Batnick compiled year-end price targets from Wall Street’s alleged expert strategists going back to 2005 (2018; 2017; 2016; 2015; 2014; 2013; 2012; 2011; 2010; 2009; 2008; 2007; 2006; 2005) and found that out of the 153 price targets, only six called for lower prices. The average forecast was a nine percent gain which, not surprisingly, is right around the average annual return, even though the actual return is almost never average. In December 2007, Barron’s wrote “the dozen seers we’ve surveyed all have penciled in higher stock prices in 2008…On average, the group sees the Standard & Poor’s 500 at 1,640.” It closed at 903. Alleged Wall Street experts expected 8.6 percent returns in 2018. Instead, the S&P 500 lost 4.4 percent. Central banks and professional investors are no better.

We can stipulate that these forecasters are smart and experienced and that they focus pretty much all their time and attention on the markets. We can also stipulate that they are horrible at forecasting the markets.

In each of these unfortunate cases, “mistakes were made,” a phrase the political analyst William Schneider says should be called the “past exonerative” tense, because the errors are obvious and acknowledged, but nobody accepts any responsibility.

The entire charade has gotten so ridiculous that within the first week of the current new year, January 6, 2019, many Wall Street market forecasts for the year had already been withdrawn and significantly altered. They couldn’t even survive for a week. Of course, these new and revised predictions could be right. However, if they are, it will be more accidental than prescient. Numbers don’t drive markets. Narratives do. Facts don’t get in the way of our desiring stories. Facts don’t get in the way of our desired stories. As the mathematician Alfred Cowles observed decades ago, people “want to believe that somebody really knows. A world in which nobody really knows can be frightening.”

If you think you (or “somebody”) can predict the future of the markets, think again. Your crystal ball does not work any better than anyone else’s. Even when we recognize the fallacy of thinking in terms of single, linear causes (Fed policy, market valuations, etc.), the markets are still too complex and too adaptive to be readily predicted, as we have already seen. There are simply too many variables to predict market behavior with any degree of detail, consistency, or competence. Pretty much the only forecast that is almost certain to be correct is that market forecasts will be wrong. If they are right, it’s surely more because of luck rather than skill.

Remember, everybody talks their book. Every major investment firm still calls for decent returns in 2019, often after a difficult first half. They may be right, of course, but they also have an interest in their clients and prospects being positive about the markets. On the other hand, major bond shops, such as DoubleLine and Pimco, have a different interest and are, accordingly, much less sanguine. Again, they too may be right, but their forecasts also align with their business models. As Warren Buffet reminds, “[f]orecasts usually tell us more of the forecaster than of the future.”

We may be lousy at investment forecasts (and we are), but the idea that we can live our investing lives forecast-free is as erroneous as the market predictions that are so easy to mock. As Cullen Roche emphasizes, “any decision about the future involves an implicit forecast about future outcomes.” As Philip Tetlock wrote: “We are all forecasters. When we think about changing jobs, getting married, buying a home, making an investment, launching a product, or retiring, we decide based on how we expect the future to unfold.”

It’s a grand conundrum for the world of finance. We desperately need to make forecasts to succeed but we are remarkably poor at doing so. The record of 2018 forecasters was, yet again, dreadful. I predict more of the same in 2019.

____________________

* I know Mike Lombardi and like him a lot. He is smart and engaging and has always been more than generous in sharing his time and expertise with me. His book is excellent. You should read it. But he blew it here (for which he apologized), even if you think Pederson benefitted from some very good luck and is now overrated.