Investment U

The Investment U E-Letter: Issue # 330
Tuesday, April 20, 2004

US Interest Rate ProjectionsHow to NOT Predict Interest Rates
By Dr. Steve Sjuggerud, President, Investment U

Jim Bianco made an astounding discovery, one that everyone should see regarding interest rate projections

Jim has spent his life with the exciting work of studying bonds and interest rates for a living. In his world, it’s not often that you come up with something useful for the Regular Joe. But he did it

In short, Jim discovered that the economists and market professionals who are paid big bucks to do one thing – predict long-term interest rates – are nearly always wrong.

They are so wrong, not only can they not predict the future movement of interest rates with any degree of accuracy, they cannot even predict the DIRECTION interest rates will move in the next six months. In fact, you can make more money off interest-rate movements with a simple coin-flip than you can with the predictions of so-called experts. Let me explain

The Wall Street Journal’s Forecasting Folly on Interest Rate Projections

Every six months, The Wall Street Journal, with the best of intentions, interviews the most prominent economists that predict interest rates on Wall Street. It’s been doing this for over 20 years.

Bianco went back and studied the archives all 43 of those Wall Street Journal economist surveys over two-plus decades. Amazingly, Bianco discovered that the professional economists as a group successfully predicted the future direction of interest rates just 13 out of 43 times.

Said another way You can flip a coin to determine whether interest rates will go higher or lower in the next six months, and chances are your coin-flip prediction (with a 50% probability) would beat the collective guesses of the “pros” (who’ve been right only 30% of the time).

The Moral: You Can’t Predict Interest Rates

The moral to this story, of course, is that if the people who are paid to spend their entire lives predicting interest rates can’t do it successfully, how can you think you know where interest rates are going?

The topic of interest rate projections have a lot of people talking, as well as mortgage rates, and how they have to go up from here. I don’t join in. I know that predicting interest rates is a fool’s game. It’s best not to make any financial decisions in your life based on a guess about the direction of interest rates.

If anything, the near-unanimous consensus for higher rates could be considered a contrary opportunity for those bold enough. The fact that EVERYONE thinks long-term interest rates will move higher may actually be an opportunity to bet on the opposite: that interest rates will actually move lower.

I know I can make a convincing, intelligent argument about the direction of interest rates. But in the end, it may not end up making you any money. For my own good, I’ll just avoid interest rate projections of any kind You might consider avoiding them too including your own

Good investing,

Steve

P.S. Below are more articles on the topic of interest rates from the Investment U Archives:

• Interest Rate Forecast: The World’s Best Prediction for 2005 Will Surprise You
• Interest Rate Prediction: How Low Can They Go?

Investment U Archives