Sunday, January 20, 2008

Bulls Face Responsibility For Their False Forecasts

As those of us bearish on the U.S. economy and stock market have been proven right, the bulls are getting incrasingly uncomfortable when they are reminded about their incorrect prediction.

Jim Cramer who made a $50,000 bet with trader Eric Bolling that financial stocks would outperform gold and oil, have now been forced to pay out that sum to Bolling as financial stocks have plummeted while gold and oil have soared. Cramer was in other words about as wrong as you could get.

Cramer, in a statement blames his loss on "Federal Reserve Chairman Ben Bernanke's failure to cut interest rates more aggressively."

There are serious problems with that loss. First of all, when making forecasts about investments, you're supposed to take monetary policy actions into account and failed predictions of monetary policy is as bad as other failed predictions to the extent it affects the outcome of your investment advice. Secondly, it is more than pathetic to claim that Bernanke didn't cut rates agressively. Indeed, as is shown in the video I posted on Thursday, Cramer had forecasted only 50 basis points in interest rate cuts, as compared to the actual cut of 100 basis points. Thirdly, if the Fed had cut even more that wouldn't have affected the outcome of Cramer's bet with Bollinger. The reason for this is that oil and gold usually get as much boost from rate cuts as financial stocks.

Another bull who is being reminded of his inaccurate forecasting is Don Luskin. Luskin in this video recommends people to buy stocks, which Peter Schiff comments by saying that "if you want to lose money, sure go ahead and do that", whereupon a fierce debate which apparently caused the two to develop hard feelings toward each other.

As we all know, anyone who followed Luskin's advice of buying stocks did in fact lose money, just as Schiff predicted. And also, Schiff is clearly being proven right in his assessment of the general state of the U.S. economy. Luskin here tries to divert attention from this by implying that Schiff is obsessed with this thing and by saying that global stock markets have performed lousy too. Whether Schiff is obsessed with getting the record straight about who was right depends on what you mean by obsessed, but let's say Schiff is no more obsessed about it than Luskin is about pointing out errors in Paul Krugman's forecast. And to the extent Schiff have recommended foreign stocks, Luskin is partially right that they have performed almost as bad as U.S. stocks. However, there have been a better investment alternative than stocks and that is commodities like gold and oil, which Schiff has been very bullish about.


Anonymous Anonymous said...

but now gold and oil is fallig with the stocks producing these things, along with commodities

do you not think that when "core" inflation falls within a few months FED will start "easing" quite heavely?

Göran, Sweden

10:24 AM  
Blogger stefankarlsson said...

The decline in gold is likely just another temporary correction of the kind that always appears in bull markets, as is the decline in oil. In oil, an exaggerated fear of falling demand that will soon be proven wrong is also at work.

11:09 AM  
Anonymous FreeMarketMan said...

The stock and gold speculators are being shaken out at the moment. Remember, Gold is on of the most liquid assets you can trade. There is no counterparty risk!

Hence equity sell-offs leads to gold sell-offs. The serious gold investors don't flinch at this. We are here for the long run. Whilst paper is being obliterated, gold is preserving my purchasing power.

A lower gold price gives you a better entry point, or opportunity to add to your load. I'm not lookig at the gold price when buying. As fiat becomes available, I buy! ;-)

Have a nice day! :-)

7:16 PM  
Blogger Paul said...

That is a HILARIOUS clip from the TV program. That stooge from Kudlow? He sounds exactly like Steve Colbert! (And is dressed up to look like his brother.) When Schiff says "Why do we have a 60 billion dollar trade deficit if we're producing so much stuff?" this zealot answers: "Because we're so rich we can afford it! Because our money is so valuable, because our credit is accepted worldwide that billions of peasants worldwide are willing to work in poorly lit, poorly ventilated factories just to get our paper money because it's that precious."

What a testament to American Democracy! (I'm American, so...) And he concludes with: "Let's not talk about America being a burden on the world. America is the shining beacon of the world!"

Amen, brutha! I love this guy. Let me invest my money with him!

10:47 AM  
Anonymous Jeff said...


The point that we have Chinese factory workers supporting the excessive spending in the U.S. is an interesting point and although I'm not nearly as close to the numbers as Stefan I believe it is true.

What were all those workers to do with their savings? They could have put it into what? They could have put it into a banking system that is apparently very weak. They could have bought Chinese equities that are even more overvalued than US equities. Gold probably would have been a good investment and maybe they are part of the reason for the increase in value.

I don't believe that the Fed is entirely responsible for the increase in asset prices. It is at least in part due to too much savings in many places. Whether one can have too much savings is perhaps a laughable statement but it certainly makes earning decent returns difficult.

2:01 PM  

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