One interesting thing about markets (and politics and foreign policy) is that predictions from gurus and self-important experts have a remarkable tendency to turn out wrong. Take this Bloomberg report:
Goldman Sachs to clients: whoops. Just six weeks into 2016, the New York-based bank has abandoned five of six recommended top trades for the year.
The dollar versus a basket of euro and yen; yields on Italian bonds versus their German counterparts; U.S. inflation expectations: Goldman Sachs Group Inc. was wrong on all that and more.
In fact, the best investors tend not to show significantly better predictive ability than anyone else either. The brutal truth is no-one is reliably good at predicting short-term market movements, although smarter players are more alert to some of the potential mistakes in their perspective.
Instead, they’re mainly better at changing their mind quickly – cutting their losses and getting out of positions that move against them. They manage their risks and survive to fight another day. They figure out when they are wrong faster.
They don’t make huge overconfident predictions. Instead, they watch their exposure, as Nicholas Nassim Taleb argues.
Of course, it’s unlikely that Goldman was putting its own money behind these predictions to the bitter end. The successful traders at investment banks historically don’t pay much attention to their own economists and research in any case. As they see it, the research is really for the pension fund managers in Cleveland or Edinburgh. And press reporting of market swings is the lowest “dumb money” tier of all – something to bear in mind when the markets are scary like today.