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\u2019s imagine for a moment you don\u2019t buy our cynicism, who do you turn to for wisdom? I mean, just because their intentions aren\u2019t purely altruistic, it doesn\u2019t mean there\u00a0aren’t\u00a0smart people trying, right?<\/p>\n
Look closely at the incentives that exist in the career of a market forecaster. Forecasters generally have an assymetric payoff profile \u2013 they benefit much more when their forecasts are right than they suffer when their forecasts are wrong. When they\u2019re wrong, people just forget, but if they\u2019re right, they can live off their forecast for a long time. And the crazier the forecast, the more mileage they’ll get. \u00a0In 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\u00a0of the land of forecasting until the next crazy prediction comes true. The incentive therefore\u00a0is 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 \u2013 it\u2019s value benefits from extreme volatility. \u00a0Smart doesn\u2019t really have to figure into the equation and the winner is hailed as prophet.<\/p>\n
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\u2019m 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<\/a>) \u2013here are the highlights from the summary and culprits (bracketed comments ours):<\/p>\n 2008: Canada\u2019s housing bubble could soon burst<\/strong><\/strong> \u2013 Ottawa Citizen \/ Merrill Lynch (what happened to Merrill Lynch? I guess they should have been looking at their own back yard<\/em>)<\/p>\n 2009: Why Canada\u2019s housing bubble will burst<\/strong><\/strong> \u2013 The Tyee \u2013 indedpendent (that doesn\u2019t mean neutral<\/em>) online news outlet (Tyee, by the way, is a Chinook word usually referring to a Chinook or King salmon\u2026salmon swimming up stream, against the flow, get it?<\/em>)<\/p>\n 2010: Canada\u2019s housing market: An accident waiting to happen<\/strong><\/strong> \u2013 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 \u2013 perhaps they\u2019re in cahoots with the Tyee<\/em>)<\/p>\n 2011: Canadian home prices will crash 25%<\/strong><\/strong> – David Madani, Capital Economics (he still stuck by his forecast as recently as last year, quoted in the Financial post, saying \u2013 bitterly we imagine \u2013 \u201cEnjoy it while it lasts\u201d<\/em>)<\/p>\n 2012: Canada\u2019s housing crash begins<\/strong><\/strong> \u2013 Canada Business (we don\u2019t remember this crash, do you?<\/em>)<\/p>\n 2013: Inside the great real estate crash of 2013<\/strong><\/strong> \u2013 front page of MacLean\u2019s magazine, January 2013 (January tends to be a little early to run \u201cthe year in review\u201d type stories \u2013 house prices across the country were higher that year and Vancouver detached home sales were up nearly 80%<\/em>)<\/p>\n Don\u2019t feel bad for David Madani and the other forecasters \u2013 one day they will be right and that\u2019s when their option will pay out. Let me write the headline:<\/p>\n ????: Genius economist knew it was coming all along<\/strong><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":" 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 […]<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,7,14,12],"tags":[],"class_list":["post-491","post","type-post","status-publish","format-standard","hentry","category-all-posts","category-graham-bodel-posts","category-investment-industry-issues","category-passive-vs-active-investing"],"_links":{"self":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/491","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/comments?post=491"}],"version-history":[{"count":2,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/491\/revisions"}],"predecessor-version":[{"id":493,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/491\/revisions\/493"}],"wp:attachment":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/media?parent=491"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/categories?post=491"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/tags?post=491"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}