Monkeys Are Better at Predicting Markets than Mainstream Pundits

Investors spend a lot of time mulling over predictions and prognostications made by various mainstream analysts, economists and talking heads on TV news shows. As it turns out, you might be better off listening to monkeys.

As Jim Rickards put it, financial news TV is one big “prediction engine.” CNBC features as many as 120 guests in a single day. And most of those pundits are forecasting. The predict stock prices, interest rates, unemployment, bond prices, and on and on.

So, just how accurate are all of these predictions?

First ask yourself this question: What would you consider a solid performance? If an analyst was on target 70% of the time, that would be pretty good, right? Somebody who could accurately forecast economic and financial outcomes at a 70% clip would make a lot of money. Heck, even a 55% accuracy rating would put you in a position to make some money. You’d be right more often than not.

Now consider this: On average, a monkey will be right half the time when picking random binary outcomes — say whether stocks will go up or down. As Rickards points out, a trained monkey simply pointing at random outcomes will enjoy a 50% batting average.

Random pointing with random outcomes over a sustained period will be ‘right’ half the time and ‘wrong’ half the time, for a 50% forecasting record. You won’t make any money with that, but you won’t lose any either. It’s a push.”

So, here’s the $64,000 question. Just how accurate are the mainstream talking heads endlessly droning on and on over at CNBC, Fox Business and Bloomberg TV?

Less than 50%.

These forecasters are worse than trained monkeys at predicting markets.

And we’re not just talking about little-known, self-proclaimed financial experts here. This is true for the big boys as well, as Rickards demonstrates.

Each year, the Federal Reserve forecasts economic growth for the upcoming year. According to Rickards, from 2009 to 2016, the Fed was wrong eight years in a row.

When I say ‘wrong’ I mean by orders of magnitude. If the Fed forecast 3.5% growth and actual growth was 3.3%, I would consider that to be awesome. But, the Fed would forecast 3.5% growth and it would come in at 2.2%. That’s not even close considering that growth is confined to plus or minus 4% in the vast majority of years. Let’s not be too hard on the Fed. The IMF forecasts were just as bad.”

Rickards offers another bit of evidence, producing a chart showing projected rate hikes based on Fed Funds futures contracts traded on the Chicago Mercantile Exchange plotted along with the actual path of interest rates.

This represents the “wisdom of the crowd.” It looks like the crowd is finally on the right track. But as the saying goes, even a blind squirrel finds a nut every now and again. Remember, the monkeys are right half the time.

So, why are the mainstream experts so bad at predicting economic outcomes? It’s not because they’re dumb. It’s not because they’re not trying. The problem is they’re basing their predictions on the wrong models. Their entire worldview is fundamentally flawed. Ninety percent of these folks are rooted in Keynesian clap-trap. If you use the wrong equation, you’re going to get the wrong answer, no matter how flawless your arithmetic.

When it comes to precious metals, it’s easy to get caught up in the latest economic data and economic fortune-telling. It’s not that analysis has no value, but it should always be taken with a grain of salt. And you always want to keep your eyes on the fundamentals — supply and demand, long-term historical trends and solid economic theory. Find experts who are using the right models.

Or, you can just find a trained monkey. At least you know you’ll break even.


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Peter Schiff is an internationally recognized economist specializing in the foreign equity, currency and gold markets.