Forecast calls for change

29 Jan

A read of the book by political pundit Nate Silver ” The signal and the Noise” points out the inaccuracy of economic forecasting. Silver states that one of the problems with economic forecasting is that most economic models assume static cause and effect. These forecasts consistently err due to the fact that said models assume the economy performs in a consistent manner throughout wildly different economic cycles.  While we have always felt economic forecasts were nothing more than extrapolations of the most recent data, it must give us all pause when we realize such massive central bank intervention is based on similar flimsy tea leaf reading. How can we trust Fed forecasts regarding unemployment, housing, etc.. when the Fed itself is an active participant in the current economy and thus such a heavy influence on said variables. More importantly,the Fed is undertaking highly non-traditional policy measures under the assumption that traditional relationships between economic variables still hold. What makes the forecasting even more tenuous is that Central Bank policies have themselves become a significant variable in forecasting itself.  However you feel about the guessing game that is economic forecasting, one must be overly suspect of strategies that advocate asset allocations based on the standard equity/fixed income mix. It is becoming increasingly clear that proactive investors must readjust their thinking away from these staid asset allocation combos and begin to think about adding real assets as the core of a prudent strategy.

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