What value outrageous predictions?
Saxo Bank likes to start a new year with a slew of forecasts that appear ambitious. This year's crop of calls for 2008 is no exception and I am happy to repeat them here for anybody who didn't see our interview with Saxo's David Karsbol:
1. Ron Paul elected U.S. President
2. S&P falls 25% from its '07 high to 1,182
3. Euro/Swedish Crown falls to 8.8000
4. U.S. Dollar/Singapore Dollar falls to 1.400 and then rises to 1.600
5. Euro/Hungarian Forint rises to 275
6. At least 3 of largest U.S. homebuilders go bust
7. Chinese stock market falls 40% by late summer
8. Grain prices double, again!
9. World oil prices accelerate to $175
10. UK growth turns negative
How wide of the mark will these predictions be? Only time will tell of course, but David points out that almost a quarter of their predictions for 2007 were 100% accurate. They also called the direction of Fed rates. By year end rates at 4.25% were just a quarter point shy of their 4% target.
Setting aside whether investors choose to follow the advice and allocate their cash accordingly, the intellectual exercise is a highly valuable one for reminding investors to think bigger. The range of possible outcomes in any investment tends to follow a bell-curve pattern, with the most likely clustering around the center, forming the body of the notional bell.
Risk analysts are very well compensated for advising asset management groups about the loss/profit profile of a particular investment. But sometimes underlying market conditions change and relative assessments of risk fall down. We appear to be in this new world.
At the start of 2007 no one predicted the failure of a UK mortgage bank, let alone the conspiracy of circumstances that resulted in a run on Northern Rock.
This is a well-tapped vein, so I won't dwell on why the financial industry created and then seemed ill prepared to deal with the credit crunch.
The point here is to remind investors to think the odd outrageous thought before committing hard-earned capital. Clearly last January's assumptions about market risk look deficient in the wake of events.