Believe it or not, financial forecasts from the analyst community and media are not designed to help you trade better or invest more wisely. They are designed to encourage you to trade more and invest more actively. Banks make more money when their clients trade more, not better. Financial media outlets make more money when they get higher advertising revenue, much of which is driven by the financial sector. But let’s imagine for a moment you don’t buy our cynicism, who do you turn to for wisdom? I mean, just because their intentions aren’t purely altruistic, it doesn’t mean there aren’t smart people trying, right?
Look closely at the incentives that exist in the career of a market forecaster. Forecasters generally have an assymetric payoff profile – they benefit much more when their forecasts are right than they suffer when their forecasts are wrong. When they’re wrong, people just forget, but if they’re right, they can live off their forecast for a long time. And the crazier the forecast, the more mileage they’ll get. In the land of forecasting, when crazy things happen, at least someone will have a prediction that is right, and that person will be king or queen of the land of forecasting until the next crazy prediction comes true. The incentive therefore is to make forecasts crazier and crazier because the payoff for being right gets bigger and bigger. Think of it as a far out of the money financial option – it’s value benefits from extreme volatility. Smart doesn’t really have to figure into the equation and the winner is hailed as prophet.
So with that in mind, rather than forgetting the wrong forecasts, we find it entertaining to celebrate them. And what better place to find extreme and extremely wrong forecasts than in the world of Canadian real estate. A Bank of Montreal economist (no schadenfreude here I’m sure) published a report highlighting some big but bad calls about the demise of Canadian real estate over the last few years. For a summary of the research click (Six Canadian Housing Forecasts that were Dead Wrong) –here are the highlights from the summary and culprits (bracketed comments ours):
2008: Canada’s housing bubble could soon burst – Ottawa Citizen / Merrill Lynch (what happened to Merrill Lynch? I guess they should have been looking at their own back yard)
2009: Why Canada’s housing bubble will burst – The Tyee – indedpendent (that doesn’t mean neutral) online news outlet (Tyee, by the way, is a Chinook word usually referring to a Chinook or King salmon…salmon swimming up stream, against the flow, get it?)
2010: Canada’s housing market: An accident waiting to happen – The Canadian Centre for Policy Alternatives (the CCPA is set up as a charity but was audited by the CRA in 2014 because it was so biased, apparently violating the degree of non-partisanship required for charitable status – perhaps they’re in cahoots with the Tyee)
2011: Canadian home prices will crash 25% – David Madani, Capital Economics (he still stuck by his forecast as recently as last year, quoted in the Financial post, saying – bitterly we imagine – “Enjoy it while it lasts”)
2012: Canada’s housing crash begins – Canada Business (we don’t remember this crash, do you?)
2013: Inside the great real estate crash of 2013 – front page of MacLean’s magazine, January 2013 (January tends to be a little early to run “the year in review” type stories – house prices across the country were higher that year and Vancouver detached home sales were up nearly 80%)
Don’t feel bad for David Madani and the other forecasters – one day they will be right and that’s when their option will pay out. Let me write the headline:
????: Genius economist knew it was coming all along