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Thoughts from the Frontline

Economists Are (Still) Clueless

June 15, 2013

Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.

- John Maynard Keynes, A Tract on Monetary Reform

There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have insight to appreciate the incredible wonders of the present.

- John Kenneth Galbraith

Hitler must have been rather loosely educated, not having learned the lesson of Napoleon's autumn advance on Moscow.

- Sir Winston Churchill

US GDP has been slowly ramping up, only to fall back and then try once more to bring us back to the '90s. Stocks markets are volatile but seemingly moving higher in most of the developed world, except for Japan, where the current 20% drop comes hard on the heels of one of their frequent "end of the bear market forever" rallies of almost 90% – how many of those have we seen over the last 24 years? Europe is mostly in recession or Muddling Through with very slow growth. I continue to read from those who know China intimately that there is a real crisis brewing there. And over the last four weeks I have highlighted how desperate the situation is in Japan.

The main obsession in the US seems to be whether and when the Fed may stop its current round of massive QE. Every hint of "tapering" spurs volatility in the markets. If you are a forex (foreign exchange) trader, you are left breathless at the recent moves, sometimes a whole order of magnitude (10 times) larger than average. Get used to it: currency wars are likely to be a feature of the landscape for the rest of this decade. (My friend Mohamed El-Erian, CEO of PIMCO, corrected me on stage recently, telling me the polite term du jour is "currency tensions." And compared to what I think is coming, we really are just in the tension phase. Later we will get to skirmishes and then full-fledged currency combat.)

At the same time, there are some things to be sanguine about, at least in the US. Corporate profits are at all-time highs. The housing market is finally doing well in most parts of the country, adding jobs and boosting GDP. We continue to find more oil and gas seemingly everywhere we look. There are no political races this summer to spoil the mood, since it's too early to for anyone to seriously run for president in 2016.

The economic forecasts of mainstream economists are quite positive, if not enirely optimistic, reflecting the current data. Should we not take heart from that? Alas, no. I have been working the last few months with my co-author of Endgame, Jonathan Tepper, on a longer paper  in which we discuss the economic affairs of the world. One of our pet amusements is to research just how bad economists really are at forecasting. (Of course, we ourselves get branded with that economist label from time to time, although most serious economists would rather not be associated with us.)

This week we look at some of our recent musings on that topic, triggered by a letter from a very serious economist who took umbrage when I wrote disparagingly about economists and forecasting a couple months ago.

But first, I announced last week that the initial group of videos from the 2013 Strategic Investment Conference is available. Well, now the final group of conference videos has also been uploaded. These videos feature some incredible speakers, including Nouriel Roubini, Charles Gave, Ian Bremmer, and my humble self. As a Mauldin Circle member, you can access the videos by logging in to your "members only" area of the Altegris website, Then…

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Tom Ervin

June 17, 2013, 11:52 a.m.

And so, who profits? Qui bono? Who gains by the wrong predictions?

1) Some of the economists, who are clever enough to get paid.
2) Some investors who are lucky enough to be right, despite much bad information.
3) Some advisors who profit from stirring the pot.
4) Others?  All of the above?

One is reminded of that wonderful recent book on risk (help me, John) and probability of prediction(s) about weather, in wartime. The meteorologist admitted he could not possibly predict the weather on certain future dates being considered for invasions—not with any reliability at all. The officers however, said, “The admirals need this for their planning!”

John Beeler

June 17, 2013, 8:32 a.m.

John: I saw this article on Zer Hedge today and thought it did a good job of confirming your idout sing eg econmists.


Guest Post: Market Punditry As Astrology!

Originally posted at Monty Pelerin’s World blog,

Is recent market behavior the beginning of a market turndown? No one knows, although it is easy to find people providing “answers.” The value of these predictions approach those of astrologers and fortune-tellers. What follows are some thoughts regarding markets.

June 17, 2013, 8:17 a.m.

I must say that there are many things missed in the letter regarding theory and forecasting. First of all, any economist must be aware of the so called “Lucas critique”, which stress the difficulties of trying to forecast based on past behavior.
Secondly, and more on the grounds of every human being, forecasting is talking about the future, and as so, it is uncertain. As clearly John Seater points out in a comment to this letter, it is easier to miss than to hit in the target.
Third, taking also the response on the letter to Seater´s example, I’ll ask Mr Mauldin what if in the moment that you are about to ride your car in the direction you were supposed to, the road is blocked? Or one of your tires is flat? Or more to the spirit of economic theory, what if you are invited to a conference extremely well paid, what would you do: take your car and go the supposed direction, or forget the car and get the conference?
And last, one more thing regarding economic thought and some misconceptions about it, we do make rational choices all the time, but it does not mean that we know in advance perfectly how the world is going to be in the future. As in my question in the previous paragraph, it might be rational to take the car to make your point, until you are invited to the conference, and your preference gets a shock, that change you rational path of choices.

bob erickson

June 17, 2013, 5:07 a.m.

Professor John Seater analogy is specious.  His response makes my point.  ‘Without any special effort I can tell you months in advance where my car is going to be. Granted one cannot predict catastrophe’s. Besides I singularly have total control over the car.  I, nor most individuals have any control over the economy, the actions by government bodies, etc.  As was pointed out by someone, in economics, history has little validity to predict future reality.  So if it is virtually impossible to predict the future, DON’T.

Wayne Bamber

June 16, 2013, 7:53 p.m.

Well done John. This article needed to be written in the worst way. For those who are looking for a reason for the corruption of economics, there was a book published about 1968 called Keynes at Harvard, Economic deception as a Political Credo by Zygmund Dobbs. It is a history of the Fabian Society. You can read it on the internet. If you read it ask yourself how far along do you think they are in their master plan with both the president and the Fed Chairman of the country professing to be Keynsians.

June 16, 2013, 7:32 a.m.

Dear Mr Maudlin,

Scott Armstrong’s point is not relevant.  The human desire to know what will happen explains the appeal of astrology and other seers; it does not explain why economists claim in the name of a scientific discipline to be so all knowing.  What he misses as does your piece is the conflict economists are in.  Like all conflicts of interest, those who find themselves in one are likely either to be blind to the issue or believe themselves able to surmount their bias.  The power that comes with being a central banker cannot exist with the admission of ignorance and the inability to know what effect one’s actions will cause.  In the private realm one’s livelihood and the livelihoods of one’s colleagues depend on knowledge.  Humility is not a good career quality.

One other point: the chart showing the record of actual vs forecast GDP suggests that the forecasts are 100 day (or so) moving averages of GDP.  The forecasts miss both the highs and the lows. Perhaps economists who claim an ability to forecast should show an ability to do better.

Yours truly,

Joseph Shier

Charley Sweet 3

June 16, 2013, 3:14 a.m.

Matt wrote: “Is it a wonder that no economist, not even Nobel Price Winners, are billionaires?”

Well, there were the LTCM guys; they did OK ... for a while.

A. Dorrance

June 16, 2013, 2:37 a.m.

This can be summarized thusly: experts can’t predict the future. A valid point, but what’s the need to repeat it?

In the experts’ defense, they are required to do predictions, because without them, policymakers would be acting blindly.

This is written implicitly asking “Why don’t the ‘experts’ see what I see?” They’d be asking the same of you (and of all of us).

John Seater

June 16, 2013, 1:12 a.m.

I thank John for his kind words about my academic research.  I also thank him for the respectful treatment of my previous comments on his previous comments.  The man is a true gentleman who understands and adheres to the rules of civil debate.  For those interested in my article on regulation and growth that he mentioned, it is now forthcoming in the Journal of Economic Growth. Volume 18 Number 2.

I want to do three things in this comment: (1) defend my previous remark about people asking the impossible of economists and then ridiculing them for not achieving it, (2) mention some evidence that economic forecasts provide useful information, and (3) add my own comments about economic forecasting.

(1) I used the analogy of driving a car to make the point of what people are asking of economists.  John quoted my analogy in today’s comment, so I won’t repeat it here.  John goes on to say my analogy is wrong because he could, if he put his mind to it, be pretty sure where his car would be in three months and he also is pretty sure where it would be on Christmas day.  John’s comment actually strengthens my own point.  *If John put his mind to it,...*  Exactly.  If he were to go out of his way to be in a particular place on a particular date, he could do it.  In other words, if he were to alter his normal behavior for the specific purpose of proving my analogy wrong, he could do it.  True enough, but that’s got nothing to do with the point I was making.  My point was very simple: if you don’t go out of your way to behave abnormally, you generally will not be able to tell me the exact position, heading, and velocity of your car three months from now.  If you want to really sharpen the analogy, let’s change it from your car to the car of someone you barely know.  Then you have no control over the car, but I am asking you to predict where it will be in three months.  You say you know how a car works, and you even know the driver, though barely, so give me a good prediction.  You can’t do it.  That is what economists are asked to do.

(2) In today’s post, John goes on at length about economic forecasts being worthless.  His argument is almost entirely by anecdote. Economists didn’t predict this recession, or they missed that downturn.  However, when he cites actual statistical evidence, it shows that economic forecasts do provide useful information.  Specifically, he quotes from Nate Silver:

“In fact, the actual value for GDP fell outside the economists’ prediction interval six times in eighteen years, or fully one-third of the time. Another study, which ran these numbers back to the beginning of the Survey of Professional Forecasters in 1968, found even worse results: the actual figure for GDP fell outside the prediction interval almost half the time.”

Now, Silver’s point is that economists (or to be more precise, economic forecasters) overstate the accuracy of their forecasts, and he is right (see below).  BUT, notice that he finds they are “right” fully two-thirds or at least one-half of the time!  That is not bad when you think about what they are trying to do.  They are not just trying to say “up” or “down” but to give actual numbers at specific times in the future, such as “up by 1/2 of 1% in three months” or “up by 2.3% in one year.”  Numbers are a continuum, and these guys are trying to pick a point on the number line that will hold at some specific time in the future.  That’s much, much harder than predicting a coin flip.  With a coin flip, you have to do much better than 50-50 to be able to say you can forecast.  Picking a number out of continuum (albeit on a restricted interval of the number line) literally has a zero probability of being right, so the forecasters rarely hit the number right on the head.  That’s why they provide “confidence intervals.”  That economic forecasters can get a number inside a reasonable confidence interval 2/3 or 1/2 the time tells me that they really do have something useful to say, especially when you remember that they are not driving the car.

(3) I am not an economic forecaster, so I have nothing personal at stake in this debate.  Forecasters overstate the accuracy of their forecasts.  Why?  Because they are paid to do so.  People pay big bucks for dramatic forecasts.  That’s what people like to hear.  People also remember single events that stand out and forget the rest.  A broken clock is right twice a day.  Similarly, some forecasters routinely predict recessions, and when one finally comes along, they can claim to have foreseen it.  People remember the one they got right and forget all those that they got wrong.  Given incentives like that, it is no wonder forecasters overstate their case.  That’s not an excuse, just an explanation.  I myself find forecasters’ overselling distasteful, but maybe that’s one reason I am just an academic and not a forecaster.

June 16, 2013, 12:47 a.m.


Outstanding thought-provoking letter, as usual.  Or should I say, despair-provoking.

So, economists are “irritated” by accusations of being wrong future seers.  But they are simply terrified by being accused of being “right self-fulfilling prophets.”

That’s why they won’t predict bad economic news, especially if they have the honor of being famous planners and advisers to the government.

Always thank you for what you do,

Dino de Falco, Austin, TX

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