Why have economic forecasters recently been so wrong? Just two years
ago, for example, the common perception was that the big emerging
markets would drive global growth. That oil prices would remain above
$100 per barrel. That interest rates would move higher. All of these
predictions have been wildly wrong.
Yet these variances are neither a coincidence nor a temporary phenomenon. We have entered an age in which economic and financial forecasting is much harder and less reliable.
Why? Because financial markets and financial investors are increasingly driving the world economy and it is inherently volatile. Total global assets under professional management have now increased to an astonishing $75 trillion, according to Boston Consulting Group. These gigantic amounts are rocketing around the globe looking for returns. The result is that commodity markets, corporations, governments and other sectors are being relentlessly financialized—or tied to the fortunes of investments in markets—and thus less predictable.
Start with global growth. The International Monetary Fund’s 2013 forecast projected that global growth would accelerate to 4.1% the following year, with emerging markets like Brazil and Russia projected to grow at 4% and 3.8%, respectively. The Federal Reserve published a similar forecast. But today the biggest economic story in the world is slowing global growth, not expansion. Both Brazil and Russia are in recession, i.e., negative growth. In other words, a huge miss.
Next, interest rates. Less than two years ago, Goldman Sachs projected that the U.S. federal-funds rate, which is set by the Fed, would steadily rise and hit 4% this year. The bond futures markets, which incorporate massive trading volumes, also were implying an upward march of rates. Today, though, the federal-funds rate is 0.5% and open market rates have been hitting record lows in the U.S. and around the world. The predictions could hardly have been more wrong.
Then, oil prices. Exactly two years ago, the Energy Information Administration, the world’s best-known energy forecaster, projected in its reference case that oil prices would rise steadily from the mid-$90s over the next decade, while their low-bound projection didn’t fall below $70. The consensus was that demand for oil would be consistently strong. Instead we’ve seen the opposite happen. Prices fell sharply over the past year, hitting $29 per barrel and now sitting in the upper $40s.
These aren’t obscure categories—growth, interest rates and oil prices. These normally are good forecasters. Yet unpredictability may be the new normal, thanks again to finance, which increasingly is driving all global economics. Take the oil market. Approximately 80% of oil trading today takes place between financial institutions, not producers or users of the product. Oil has become a financial instrument, like gold. And it is subject to the same volatility which we see in the stock market, for example. Since many other commodity prices track oil prices and thus are tied to finance, too.
Financial factors also are increasingly dominating corporations—and the result is very short-term behavior. The rise of shareholder activism, hostile takeovers and newer techniques of executive compensation have put managements and boards of directors under tremendous pressure to deliver returns to shareholders now. The result is increasing focus on immediate earnings and share-price movements.
Nearly 80% of respondents to a 2014 CFO survey in the Harvard Business Review said they would sacrifice “economic value” to meet Wall Street targets. This is why so much capital has been used for share-buyback programs, rather than for long-term investment. With corporations themselves losing focus on the long term, it is harder for anyone to forecast their performance.
Financial markets are also encircling governments, as we’ve recently seen in China. For years, China’s economic and monetary authorities were viewed as skilled and effective. Then last fall the Chinese stock markets became extremely volatile. The authorities alternatively closed the markets, reopened them, imposed various limits on them, suddenly revalued their currency and severely undermined global confidence in the country. In other words, China’s authoritarian regime has been able to control almost everything, except the behavior of financial markets.
And why was Brazil’s President Dilma Rousseff impeached in May? In part, because Brazil is a commodity-centered economy and financial investors had driven down commodity prices and pushed the country into a deep recession. For the same reason, Russia has also fallen into recession, its currency has nearly collapsed and its financial reserves are dwindling. All of this will eventually compromise President Vladimir Putin’s global aggression.
Finance now represents the most powerful force on earth, even beyond nuclear weapons. Commodity prices, corporations and governments are increasingly at its mercy. Which is why reliable economic and financial forecasting may be history.
Market swing
forex signals
fx signals
currency signals
Yet these variances are neither a coincidence nor a temporary phenomenon. We have entered an age in which economic and financial forecasting is much harder and less reliable.
Why? Because financial markets and financial investors are increasingly driving the world economy and it is inherently volatile. Total global assets under professional management have now increased to an astonishing $75 trillion, according to Boston Consulting Group. These gigantic amounts are rocketing around the globe looking for returns. The result is that commodity markets, corporations, governments and other sectors are being relentlessly financialized—or tied to the fortunes of investments in markets—and thus less predictable.
Start with global growth. The International Monetary Fund’s 2013 forecast projected that global growth would accelerate to 4.1% the following year, with emerging markets like Brazil and Russia projected to grow at 4% and 3.8%, respectively. The Federal Reserve published a similar forecast. But today the biggest economic story in the world is slowing global growth, not expansion. Both Brazil and Russia are in recession, i.e., negative growth. In other words, a huge miss.
Next, interest rates. Less than two years ago, Goldman Sachs projected that the U.S. federal-funds rate, which is set by the Fed, would steadily rise and hit 4% this year. The bond futures markets, which incorporate massive trading volumes, also were implying an upward march of rates. Today, though, the federal-funds rate is 0.5% and open market rates have been hitting record lows in the U.S. and around the world. The predictions could hardly have been more wrong.
Then, oil prices. Exactly two years ago, the Energy Information Administration, the world’s best-known energy forecaster, projected in its reference case that oil prices would rise steadily from the mid-$90s over the next decade, while their low-bound projection didn’t fall below $70. The consensus was that demand for oil would be consistently strong. Instead we’ve seen the opposite happen. Prices fell sharply over the past year, hitting $29 per barrel and now sitting in the upper $40s.
These aren’t obscure categories—growth, interest rates and oil prices. These normally are good forecasters. Yet unpredictability may be the new normal, thanks again to finance, which increasingly is driving all global economics. Take the oil market. Approximately 80% of oil trading today takes place between financial institutions, not producers or users of the product. Oil has become a financial instrument, like gold. And it is subject to the same volatility which we see in the stock market, for example. Since many other commodity prices track oil prices and thus are tied to finance, too.
Financial factors also are increasingly dominating corporations—and the result is very short-term behavior. The rise of shareholder activism, hostile takeovers and newer techniques of executive compensation have put managements and boards of directors under tremendous pressure to deliver returns to shareholders now. The result is increasing focus on immediate earnings and share-price movements.
Nearly 80% of respondents to a 2014 CFO survey in the Harvard Business Review said they would sacrifice “economic value” to meet Wall Street targets. This is why so much capital has been used for share-buyback programs, rather than for long-term investment. With corporations themselves losing focus on the long term, it is harder for anyone to forecast their performance.
Financial markets are also encircling governments, as we’ve recently seen in China. For years, China’s economic and monetary authorities were viewed as skilled and effective. Then last fall the Chinese stock markets became extremely volatile. The authorities alternatively closed the markets, reopened them, imposed various limits on them, suddenly revalued their currency and severely undermined global confidence in the country. In other words, China’s authoritarian regime has been able to control almost everything, except the behavior of financial markets.
And why was Brazil’s President Dilma Rousseff impeached in May? In part, because Brazil is a commodity-centered economy and financial investors had driven down commodity prices and pushed the country into a deep recession. For the same reason, Russia has also fallen into recession, its currency has nearly collapsed and its financial reserves are dwindling. All of this will eventually compromise President Vladimir Putin’s global aggression.
Finance now represents the most powerful force on earth, even beyond nuclear weapons. Commodity prices, corporations and governments are increasingly at its mercy. Which is why reliable economic and financial forecasting may be history.
Market swing
forex signals
fx signals
currency signals
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