Forecasting challenge!

[oldfart]

Today's BLS announcement reminded me of my failure to follow up on our forecasting challenge, an oversight I regret and remedy herein. After discussion, contemplation, and some of my son's home brew mead, I decided to generally stick to indicators that the Congressional Budget Office makes predictions on.

The rules are simple:

1. Anyone can participate. You are welcome to give your reasoning or not.

2. You are free to make as many forecasts as you wish. Each forecast will be considered a separate entry. For practical reasons, I expect most folks to make a forecast every month or less frequently. If something weird happens, everybody gets to adjust their predictions; if not, you are free to take another stab at it when you realize your earlier prediction will be off the mark.

3. Obviously, the goal is to make predictions that are close to the mark when the real numbers come in. Anyone beating the CBO projections gets a mention in our Forecasting Hall of Fame. Anyone who beats me, also gets a plate of crawfish etoufee at Joe Patti's in Pensacola.

So here are the measures we will predict and the CBO projections.

1. Interest rate: the December 2014 yield on Treasury ten year notes. According to CBO, the average rate was 2.4% in 2013, and is projected to be 3.1% in 2014 and 3.7% in 2015.

2. Inflation: I'm going to propose two measures here:
a) the "core" CPI for the fourth quarter. This was 1.7% in 2013 and CBO projects it to be 1.9% in 2014 and 2.2% for 2015. We'll forecast the fourth quarter average for 2014.
b) the spread between the 10-year Treasury bill and 10-tear TIPS rates. For the March 2014 auctions, this was 2.070%. We'll forecast the December spread.

3. Budget Deficit: the CBO reports the 2013 deficit to be $680 billion and projects it to be $514 billion in 2014 and $478 billion in 2015.

4. Growth of real GDP fourth quarter to fourth quarter. For 2013 this was 2.1% and CBO projects 3.1% in 2014 and 3.4% in 2015.

5. Employment: We'll use three measures here:
a) Fourth quarter average "official" (U-3) unemployment: CBO lists it as 7.0% for 2013 and forecasts 6.7% for 2014 and 6.3% for 2015.
b) Broader (U-6) unemployment: CBO does not forecast this item. In December 2013 it stood at 13.1% in the BLS report and in March was 12.7%. We'll forecast the December 2014 rate according to BLS.
c) Employment-to-population ratio: Again from BLS, this was 58.6% in December 2013 and 58.9% in March. We'll forecast the rate for December 2014.

Without further ado, here are my forecasts:

1. 10-year Treasury yield: 2.9%

2. Inflation: core CPI 1.7% and Treasury--TIPS spread 2.3%

3. Budget deficit: $535 billion

4. Real GDP fourth quarter to fourth quarter growth: 2.4%

5. Employment: U-3 at 6.8%, U-6 at 12.4%, and employment-to- population ratio of 60.4%

I remind everyone of Fiedler's Four Rules of Economic Forecasting:

1. It is very difficult to predict, especially the future.

2. Every time you make a prediction you know you are wrong, just not in which direction.

3. He who lives by the crystal ball learns to eat ground glass.

4. If you ever nail it; never let them forget it!




So let the games begin!

 

[william the wie]

Your predictions fall outside of my circle of competence so my predictions will focus on areas where I can find my butt 3 out of 4 times.

margin totals that exceed 2% of GDP predict lower returns over the next 6-12 months. we are now at 3%.

Robotics and 3D manufacture were supposed to increase net insourcing of jobs from China in 2015 according to McKinsey. The report is available for less than three dollars from Kindle. Available anecdotal evidence indicates that the tipping point was reached in January.

Therefore my rather odd prediction.

Overestimation of US equity exposure to China will lead to an exaggerated dip that will create one of the greatest long investment opportunities ever later this year.

 

[Zander]

1. 10-year Treasury yield: 1.25%

2. Inflation: core CPI - a negative number = deflation

3. Budget deficit: $700 billion +

4. Real GDP fourth quarter to fourth quarter growth: < 0 = negative number

5. S&P will be down by 25% for the year.

I am an optimist this year!!

 

[william the wie]

1. 10-year Treasury yield: 1.25%

2. Inflation: core CPI - a negative number = deflation

3. Budget deficit: $700 billion

4. Real GDP fourth quarter to fourth quarter growth: < 0 = negative number

5. S&P will be down by 25% for the year.

I am an optimist this year!!

As is your wont.

 

[oldfart]

1. 10-year Treasury yield: 1.25%

2. Inflation: core CPI - a negative number = deflation

3. Budget deficit: $700 billion +

4. Real GDP fourth quarter to fourth quarter growth: < 0 = negative number

5. S&P will be down by 25% for the year.

I am an optimist this year!!

Wow! I thought my predictions were a bummer!

In one sense the first (interest rates) are a near gimme. Since the FED controls monetary base, interest rates are not going to be too far from target most of the time. But that's the short-term rate. The ten year rate is more iffy.

 

[william the wie]

1. 10-year Treasury yield: 1.25%

2. Inflation: core CPI - a negative number = deflation

3. Budget deficit: $700 billion +

4. Real GDP fourth quarter to fourth quarter growth: < 0 = negative number

5. S&P will be down by 25% for the year.

I am an optimist this year!!

Wow! I thought my predictions were a bummer!

In one sense the first (interest rates) are a near gimme. Since the FED controls monetary base, interest rates are not going to be too far from target most of the time. But that's the short-term rate. The ten year rate is more iffy.

For equity holders a bond bear such as 1902-29 or the run up to the Reagan interest rate peak (The nominal vs. real aftertax interest rate starting date is not a debate I will join.) is very good news. In fact it is one of the postulates of the Modigliani portfolio. While I much prefer the Browne rif on Modigiliani because of reduced transaction costs that Modigliani ignored it still works well. The Modigliani can still be back tested throughout known financial data to produce highly positive returns with a low coefficient of variance that is beaten only by the Browne portfolio in real world funds over 10-50 year periods. While I suspect it can be beaten in 5-10 year periods I am not aware of this having been reported.

 

[sjay]

1. 10 yr.treasury 3.1%
2. no accurate way available to measure
3. budget deficit 600 billion
4. gdp 1.8%
5. unemployment U3 6.6% real unemployment 12% s&p down 20%

 

[oldfart]

Every week or two I intend to post here to keep the thread on the first page and to provide some updates for folks who want to play the forecast game. The International Monetary Fund has released today its update to the World Economic Outlook.

For the United States IMF is projecting about a 12% chance of recession in the next year, exactly the same as was projected in the October 2013 WEO. Probability of deflation in the 4th qtr 2014 has fallen from 7.5% to 2.5%. Projected real GDP growth rate 4Q to 4Q is 2.7%. Core inflation is projected at a bit under 1.5%. The Fed's stated goal is 2.3% by the WEO definition and projected consensus inflation for 2014 is 1.6%. Unemployment in the US is projcted at 6.4% for 2014.

Those with a strong masochistic streak can read the full report at
http://www.imf.org/external/pubs/ft/weo/2014/01/pdf/text.pdf

You really want to see "Figure 1.SF.4. Rolling Root-Mean-Squared Errors: Recursive
Estimation" of Brent benchmark crude?

 

[oldfart]

If we are getting into the prediction business, let's look at how we have done so far for 2014. I looked up the latest numbers and here is how I stand on the April predictions:

INTEREST RATES
10 year Treasury note yield
My prediction: 2.9%
October auction results: 2.34%

I expected higher rates due to a more robust recovery, but it seems I was overoptimistic.

INFLATION:
Core CPI reported by BLS
My prediction: 1.7%
October BLS report: 1.7% (See Fiedler's Fourth Rule above)

TIPS--T note spread reported by Treasury
My prediction: 2.3%
Treasury October auction: 1.8%
Obviously the CPI data is much superior to the Treasury spread in measuring inflation!

BUDGET DEFICIT:
My prediction: $535 billion
FY 2014 ended in Sept: $483 billion

GROWTH OF GDP
My prediction: 2.4%
current YOY: 1.5%
What can I say? The expected recovery sucks.

EMPLOYMENT:
My prediction U-3: 6.8%; U-6: 5.8%; employment/population ratio: 60.4%
latest BLS: U-3: 5.8%; U-6 1.5%; emp/pop ratio: 59.2%

Labor market weaker than I expected, but I underestimated the numbers exiting the labor force.

I'll take a look at how close others got in another post.

 

[Zander]

I know this wasn't one of the categories, but I am forecasting a top in the DOW at 17,620.

I went short today using the DOG ETF at $23.73 per share.

 

[ShackledNation]

I know this wasn't one of the categories, but I am forecasting a top in the DOW at 17,620.

I went short today using the DOG ETF at $23.73 per share.

I am preparing to go short as well, and have an order waiting on that same ETF because I don't think the bull market is over yet.

It seems undeniable that the stock market is in a bubble. The increases in stock prices have corresponded uncomfortably close with the Fed's QE rounds. 10 year P/E ratios are also at levels that have only been surprised 3 times--1929, 1999, and 2007. We all know what followed those dates.

Add the fact that QE is over and interest rates are poised to rise and I see a stock market crash and a correction of the economy. When this occurs depends largely on the policy of the Fed--if they start to inflate again, the market will be propped up. This crash may also spread into housing, as those prices seem artificially high once again.

I would predict that by the end of next year this will happen, based on when the Fed has said it will increase interest rates. I guess my more nuanced prediction is that once those interest rates are increased, a correction is soon to follow.

 

[SteadyMercury]

man I wish oldfart posted more....

 

[william the wie]

man I wish oldfart posted more....

Don't we all.

 

[oldfart]

I know this wasn't one of the categories, but I am forecasting a top in the DOW at 17,620.

I went short today using the DOG ETF at $23.73 per share.

I am preparing to go short as well, and have an order waiting on that same ETF because I don't think the bull market is over yet.

It seems undeniable that the stock market is in a bubble. The increases in stock prices have corresponded uncomfortably close with the Fed's QE rounds. 10 year P/E ratios are also at levels that have only been surprised 3 times--1929, 1999, and 2007. We all know what followed those dates.

Add the fact that QE is over and interest rates are poised to rise and I see a stock market crash and a correction of the economy. When this occurs depends largely on the policy of the Fed--if they start to inflate again, the market will be propped up. This crash may also spread into housing, as those prices seem artificially high once again.

I would predict that by the end of next year this will happen, based on when the Fed has said it will increase interest rates. I guess my more nuanced prediction is that once those interest rates are increased, a correction is soon to follow.

First a disclaimer: I have been notoriously bad at market forecasting, especially timing. Back in the day when I maintained my 65 license, I put everyone in a managed portfolio except when it was obvious the market was oversold (I got all but one client out of equities in 2007 before I retired). My one shining moment was in Oct 2008 when I called the the Dow bottom within 500 points and 60 days.

Yes, the market is massively oversold. The main reason to hold equities long now would be to be able to write options on them. [hyperbole, but true]. As I am not in the equities market, I have no dog in the fight. For investment I would play the long game and stay liquid. Equities and bonds do not look attractive right now with more downside than upside; so the old maxim of holding cash (or increasing LT debt a current rates) to be able to take advantage of falling markets looks good. With trillions in cash floating around banks and corporations I wouldn't get too greedy; they intend to bottomfeed also.

 

[oldfart]

man I wish oldfart posted more....

Don't we all.

Thanks for the vote of confidence! I'll try to post more often than of late. What holds me back more than anything is that the reply to most posts would be repetitive. We rehash the same arguments with the same outcomes. Help me find some new material!

I did run across an interesting column on the Neo-Fisherites which is worth some comment; coming soon.

 

[Zander]

I know this wasn't one of the categories, but I am forecasting a top in the DOW at 17,620.

I went short today using the DOG ETF at $23.73 per share.

I am preparing to go short as well, and have an order waiting on that same ETF because I don't think the bull market is over yet.

It seems undeniable that the stock market is in a bubble. The increases in stock prices have corresponded uncomfortably close with the Fed's QE rounds. 10 year P/E ratios are also at levels that have only been surprised 3 times--1929, 1999, and 2007. We all know what followed those dates.

Add the fact that QE is over and interest rates are poised to rise and I see a stock market crash and a correction of the economy. When this occurs depends largely on the policy of the Fed--if they start to inflate again, the market will be propped up. This crash may also spread into housing, as those prices seem artificially high once again.

I would predict that by the end of next year this will happen, based on when the Fed has said it will increase interest rates. I guess my more nuanced prediction is that once those interest rates are increased, a correction is soon to follow.

First a disclaimer: I have been notoriously bad at market forecasting, especially timing. Back in the day when I maintained my 65 license, I put everyone in a managed portfolio except when it was obvious the market was oversold (I got all but one client out of equities in 2007 before I retired). My one shining moment was in Oct 2008 when I called the the Dow bottom within 500 points and 60 days.

Yes, the market is massively oversold. The main reason to hold equities long now would be to be able to write options on them. [hyperbole, but true]. As I am not in the equities market, I have no dog in the fight. For investment I would play the long game and stay liquid. Equities and bonds do not look attractive right now with more downside than upside; so the old maxim of holding cash (or increasing LT debt a current rates) to be able to take advantage of falling markets looks good. With trillions in cash floating around banks and corporations I wouldn't get too greedy; they intend to bottomfeed also.

Excellent advice OF. My own disclaimer: I keep my serious money in a balanced portfolio of stocks, bonds, and commercial real estate. I don't mess with this money-other than to rebalance periodically.


But I do have a "fun money" account that I trade with....