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The RBA's rates decision this afternoon?
No idea.
That's… kind of an unusual answer.
Most talking heads have a view, a forecast or a prediction.
Not me.
Oh, I could give an educated guess. I could convince myself I know what I think it'll do, probably based on the wisdom of crowds, and 'interpretation' of RBA statements, and… I might even be right. Or not. The folly would be in letting myself think I know.
Why? Because it's a parlour game.
No-one knows what the RBA will do. Where's the value in trying to guess?
Sure, bragging rights, if you guess correctly. And you never mention it again if you get it wrong.
But to what end?
"Pundits," as John Kenneth Galbraith once said, "forecast not because they know, but because they are asked".
Yes. Quite.
I am asked. A lot.
Each time I grin sheepishly and say 'I don't know'.
Not every interviewer loves that answer. But they know it's what I'm going to say.
I then explain why I don't give forecasts, but also talk about the inputs into the RBA's decision so that the audience is at least a little more informed.
I figure that's the role of what I might unkindly call 'the punditry' (and yes, I'm putting myself in that uncomfortable camp).
Economics is at its best when it explains. It is at its worst when it tries to pretend it can predict.
Speaking of which, though, the bond market essentially makes predictions all the time.
Well, more 'educated speculation', to be honest.
See, if you're in the business of investing in fixed interest on a wholesale level (by buying or selling bonds), you're choosing between Australian government bonds, international government bonds, corporate bonds (lending to large companies) and the like.
If you're going to buy a bond today, you're going to want a certain interest rate.
You'll weigh up the risk of default by the issuer (the company or country), the duration for which your money is locked away, and the rate on offer.
Generally, the longer the term and the greater the risk, the higher the required return.
(For example, the Financial Review reported a while back that Star Entertainment was paying its lenders 13.5%. You can draw your own conclusions on whether that's an appropriate rate – and the risk the lenders think they're taking!)
Now, if the market thinks rates are going to be lower in future, that'll impact the pricing of the bonds on offer.
And by reverse-engineering the maths, we can calculate the market's implied probability of a rate cut.
Recently?
Well, last time, the market thought the odds were 95%-plus that we'd get a rate cut.
And what did the RBA do? It held rates steady.
Oops.
And today? The implied odds are essentially 100%.
Now, the market might be right. We'll find out at 2.30pm today.
But also… the RBA has said essentially nothing new about interest rates for a couple of months.
During that time, we've seen weak GDP, strong employment (and blessedly low unemployment) and falling inflation.
So, the market has decided it's almost certain that rates will be cut today.
But think about that for a second.
What, in life, has a 96% probability? Especially after last month's 'surprise'!
Death, sure. Taxes? Absolutely. Also, the sun rising in the East.
But much else?
Especially things that are uncertain, are forward-looking, have both costs and benefits, and that involve decisions made by imperfect people using imperfect information?
I'm not saying the market will be wrong about today's rates call.
But I'm not saying that it'll be right.
What I am saying is that prediction is hard.
Worse, it's kinda useless, in any practical sense.
See, if everyone 'knows' the RBA is going to cut, and it cuts, where's the value of the forecast?
And if everyone 'knows' the RBA is going to cut and it doesn't (like last month), then the forecast is worth less than nothing!
Why do people forecast? In part because there's an audience for it.
We hate uncertainty. Even though we know the market and the pundits were wrong last time, we still read the forecasts for today.
Because, deep down, having something to hold onto is better than nothing.
Yes, even if the thing we're holding onto is worse than useless!
Now, I don't mean that as a criticism. We're basically just decently-evolved animals, and our subconscious and emotional selves still drive much of our behaviour, and most of our discomfort or contentment.
But I do want you to think about that for a minute.
I want you to become a little more comfortable with uncertainty and a little less reliant on the forecasts of (necessarily) uncertain forecasters, even if they project confidence.
(They're not necessarily lying. As George Costanza said, 'it's not a lie if you believe it'.)
Ego makes us want to believe we can forecast with accuracy. And discomfort makes us want to believe that others can, too.
Here's the other thing: if rate forecasts are just parlour games (and I think they are), it's also worth asking ourselves whether they're just distractions.
Yes, it matters when it comes to the mortgage payment. And yes, we'd rather they be lower than higher. But once we have a mortgage, it's only the RBA's decision – not others' guesses – that matters.
Worse, it can seem like, as investors, we should pay extra attention. That's because all of the other serious people are talking about it, we should have a view, too.
That we should put it in our mental models, building up a sophisticated assessment of investment potential and market pricing.
The truth? I've almost never considered the official cash rate in any personal investment, or professional investment recommendation.
I absolutely do consider the amount of debt a company has, and whether the repayments are affordable if rates increase. But I don't sweat a 25 basis point move, either way.
Frankly, if an investment's potential returns swings on whether or when rates might fall, I'm too close to the line, and I'll give it a wide berth.
By all means, have some fun guessing what the RBA might do.
But, if you're right, don't believe your own press. And don't believe the press of those who managed to guess, either.
(And remember, most of the people who said the RBA was 'wrong' last time are just justifying getting their forecasts wrong!)
Hubris is too high a price to pay for 'winning' a parlour game.
Knowing what you don't know – particularly about the future – is far better than falling for the trap of giving yourself credit and letting your ego off the leash.
There's a reason they say pride cometh before a fall.
Fool on!
