Thursday, January 15, 2015

Something's Rotten

In a poll of 67 economists in April 2014, every single one of them predicted that the 10-year Treasury yield (U.S. government bonds) would rise in the next six months.  Every one of them was extremely wrong.  The 10-year yield fell sharply for six months (and has fallen even more steeply in the 7th - 9th months).  I have invested my life savings in long term U.S. Treasury bonds, and saw these predictions when they were made.  Yet I never seriously considered changing my position.  I was somewhat intimidated, but after a bit of thought concluded that I was right to believe that the 10-year yields would move in the opposite direction of 100% of economists.

The U.S. stock market was extremely overvalued by all serious measures, and the U.S. economy had just experienced a quarter of negative GDP.   This seemed like a no-brainer, and my rationale has been rewarded handsomely, as yields have plunged, and my investment (PRULX - a long term U.S. Treasury bond mutual fund) has soared.  Either I am a freak genius, or there is something dreadfully wrong with "economists".

Today I read the following:
While it may not be an easy ride, professional forecasters on Wall Street are unanimous in seeing U.S. equities climbing by the end of this year. None of the stocks strategists tracked by Bloomberg predicts a retreat in 2015, with the average estimate calling for a 11 percent advance from yesterday’s closing level.
To me, this seems horribly absurd.  U.S. stocks are at 90th percentile levels of overvaluation, according to all reasonable measures of valuation (documentation available upon request).  The global economy is clearly entering recession.  The U.S. economy is sending mixed signals.  Yet every single professional forecaster on Wall Street sees U.S. equities climbing this year.  Moreover, the average increase predicted is 11% -- approximately 4 times the rate of growth of nominal GDP in recent years.

Something is horribly wrong.


  • Hi,

    Welcome to the wacky world of interest rate forecasting! There is a reason why people have been losing money shorting JGB's for almost two decades straight.

    But to defend "economists", the survey is mainly comprised of chief economist types at the banks. The banks' business model dictates that they are bullish on equities, and they could care less about government bonds (almost no trading revenue). They are just bearish on bonds because they like equities.

    But if you look at more junior interest rate specialists, they often roll their eyes at the chief economists' interest rate forecasts. They cannot publicly disagree, but you need to talk to them off the record to get a reasonable view. That's obviously hard to do if you're not an institutional investor...

    By Blogger Brian Romanchuk, at 6:17 AM  

  • Thanks Brian! That makes perfect sense.

    I've been reading bondeconomics.com regularly and appreciating the insight there. I wish I could comment more, but was too busy during the holiday season.

    By Blogger Detroit Dan, at 11:04 AM  

  • They're baaaaaack -- WSJ Economists' Forecasts for 10-Year Yields and the Fed Funds Rate.

    The current yield on 10-year US Treasury bonds is 1.80%, with futures even lower at 1.76% following the news of the Greek vote for Syriza. Yet among the 70 economists surveyed by the Wall Street Journal in January 2015, every one expects higher interest rates by June 2015, with the lowest yield being forecast at 2.0%.

    By Blogger Detroit Dan, at 8:12 PM  

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