Consensus on Forecasts, Underweight

The great expectations game is one all investors are forced to play.

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The consensus today is for higher global growth, higher global profits and higher bond yields as money pulls out of bonds.

Unfortunately, as the last three years have taught us, the consensus is only right until it is wrong, and when things go wrong and the tide comes out, the majority are running looking for a towel to hide their modesty.

“The remarkable thing about all consensus forecasts is that they are so wrong so often. For rational investors, they are a hopeless crutch. Citigroup’s Global Investment Committee has become more concerned about consensus expectations and is underweight in equities and overweight in bonds,” said Richard Cookson, the CIO of Citi Private Bank in an interview with CNBC on Monday.

“It is a truth universally unacknowledged in financial markets that forecasts really aren’t very useful at all, to put it politely, except insofar as they provide a spurious comfort for investors and sales people,” he said.

“Actually, it would be fairer to say that they are quite good quite a lot of the time, but that they are howlingly awful when you need them most – namely, when things fall apart” said Cookson.

Working at one of the world’s biggest banks where forecasting keeps thousands of people in work, Cookson finds this view is shunned by the market.

“People tend to look at me as if I were either (a) mad (b) stupid or (c) somehow disloyal when I say such things, but continue to say them I will, because misplaced faith in forecasters is inimical to good investing and because we are becoming rather more concerned about growth and equity markets even though the consensus is not,” he said.

“Taking the consensus of forecasts as collected by Consensus Economics, the economics profession has failed, as a group, to predict a single one of the recessions in the large developed-world countriesduring the past two decades,” said Cookson. "The remarkable thing about all consensus forecasts is that they are so wrong so often."

The economics profession has failed, as a group, to predict a single one of the recessions in the large developed-world countries over the past two decades” Strategists are no better according to Cookson, a strategist himself.

“Given that we’ve had some of the most egregiously valued stock marketsin history and, as a result, the two worst bear markets since the Great Depression in that time, you might have thought the consensus would have been a touch gloomy some of the time. Not a bit: not once during the past 10 years has the consensus predicted that the S&P would fall during the course of the following year,” he said.

“Not only are analysts everywhere always wrong-footed by the extent to which profits will rise in a recovery, they completely fail to predict how much profits fall in a downturn – or, indeed, that they will fall at all,” Cookson said. Bond strategists do no better in Cookson’s view.

“During the past 12 years, US bond strategists’ yield forecasts have consistently been too high. In other words, their 12-month yield targets have consistently been too bearish compared with the level at which bond yields eventually ended up. In the interests of scrupulous fairness, the bias is less pronounced elsewhere, but still very striking,” he said.

Given Cookson is now feeling rather nervous and gloomy he often gets the following thrown at him.

“On those oh-so-mercifully-rare occasions when we succumb to a bout of gloominess, one argument often thrown back at us is that our views fly in the face of the consensus for growth, earnings, stocks or bonds,” Cookson said.

“The second reason why we have been banging on about all of this is that we have become increasingly worried that growth expectations in the developed world are too high. Notice the word 'expectations' in that previous sentence: for markets, what matters is what happens to growth expectations, not what the ex post numbers actually are,” he added.