Bring back the "haruspex" please
The IMF and OECD remain quite confident that the world economy is just undergoing a soft patch. (Bank) economists have been issuing buy-recommendations on equities, corporate and high yield bonds, Greek debt and the new Coldplay-CD. The latter is a good reference point, because just like some recent Coldplay-songs, we have a "flashback"-experience when listening to the forecasts of all the government institutions and the the other pundits. The songs of 2011 are very similar to the tunes of the Summer of 2008.
The forecasts for the next 18 months are extremely unreliable,, because:
- they rely on the conviction that we are in a classic post-recession recovery phase
- the assumption that we can/have to achieve GDP growth of 2% (EU) and 3% (US)
- that emerging markets growth is sustainable
None of the above assumption are true in our opinion.
We are not in a normal cycle, but in the midst of a structural and profound change of the system. The systemic crisis in energy, finance, environment and society are still following the broad scenarios outlined in Econoshock (2008).
Forecasting 2012 or 2013 GDP growth are therefore pointless for most investors and decision makers. The "Abby Cohen"-kind of forecasts for the next 3 months (or 6 months in the best case), are just a show to feed the hunger of the trading desks and the P/L of the Goldman Sachs's of our financial world.
It is no coincidence that after each correction, we see bullish forecasts. Not surprisingly, Cohen gave the example on Wednesday with a forecast that reads as follows:
In keeping with a long history of bullish forecasts, Abby Joseph Cohen told CNBC that even though her firm cut its quarterly gross domestic forecast last week from 3 percent to 2 percent, that doesn't reflect broader pessimism about where the economy and markets are heading.
"We believe that 2 percent GDP number for the quarter is something that represents special factors in the quarter and we do think economic growth will be reaccelerating toward the end of the year," Cohen said in a live interview.
The "underlying growth rate" for the economy will be closer to 3 percent for the remainder of the year, she said, a level that would support Goldman's prediction that the Standard & Poor's 500 will close out 2011 in the 1450 range, which would represent a 12 percent gain from current levels.
Voilà, they say in French. A slowdown is not a slowdown, when Abby Cohen explains it. As from the end of the Nineties, Cohen has been bullish almost all the way. In the process her firm has made a lot of money, and came out of the crisis in a much better shape than the vast majority of its clients. The stock price of Goldman Sachs outperformed the financial sector by a ratio of almost 2 to 1.
In ancient times, the official forecaster was called an "Haruspex". He inspected the entrails of sacrificed animals, especially the livers of sheep and the entrails of doves. The word "auspices" has been derived from haruspex, and later auspex.
Compared to today's forecasts, the work of the Haruspex was precise, reliable and worth its money.