Having seen The Wolf of Wall Street, my (somewhat juvenile, I'll admit) reaction to outlandish forecasts from financial agencies is to ask: 'Are they on drugs?'
That was exactly what I thought this morning when I saw one global advisory company forecasting that the Australian Dollar would fall to US$0.76 before finding support as strong global growth lifts commodity prices.
'Strong global growth', at a time when everyone from the IMF on down is talking about below-trend growth and how governments need to work to improve growth?
That's partly a matter of perception, with individuals having different ideas of what constitutes 'strong', and also differing on how quickly the global economy will recover.
With that said strong global growth would definitely help lift commodity prices, which would be a boon to Rio Tinto Limited (ASX: RIO) and Woodside Petroleum Limited (ASX: WPL).
One thing that should be blatantly obvious by now however is that weakness in commodity markets – particularly iron and oil – is primarily due to dramatic oversupply.
This occurred partly because demand (driven by economic growth in China among others) was expected to grow faster than it did, but it is the dynamics of supply and demand that determine price.
With Australian miners Rio Tinto and BHP Billiton Limited (ASX: BHP) acting to force down the price of iron ore, and the Organization for Petroleum Exporting Countries (OPEC) doing the same to international oil markets, it's hard to argue that lack of demand is the problem with these two key commodities.
About the only likely occurrence I could see from the forecast I read was that the AUD is going to stay below US$0.80 for the time being.
It's not just financial companies that are prone to making erroneous forecasts either, with at least one of the major international ratings agencies regularly using the market's thoughts of where price is going to inform its own forecasts.
Let's be honest, if the market knew what it was doing, it wouldn't be so chaotic.
So if you're going to use financial forecasts to inform your investing, first try to find out the methodology (i.e. what information, assumptions, and calculations) the forecaster uses to make their predictions.
Also see if you can't find out their track record – how often are they right, and how often are they wrong?
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This is unusual in the world of finance, and if there's a system that better promotes accountability and honesty, I don't know it (if only there was one of these for politicians).
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