Nouriel Roubini Talks, People Listen

Last Updated Nov 18, 2010 9:50 AM EST

Nouriel Roubini gained fame for accurately predicting the financial crisis that began in the fourth quarter of 2007. As his descriptions of the crisis proved to be accurate, he became a major figure in the U.S. and international debate about the economy, regularly appearing on CNBC. People pay attention to what Roubini has to say.

According to Wikipedia, Roubini spends much of his time shuttling between meetings with central bank governors and finance ministers in Europe and Asia. In 2009, Prospect Magazine voted him No. 2 on its "list of the world's 100 greatest living public intellectuals," Foreign Policy magazine ranked him No. 4 on its list of the "top 100 global thinkers," and Time magazine him one of the 100 most influential people in the world. He has appeared before Congress, the Council on Foreign Relations and the World Economic Forum at Davos.

In an interview with Bloomberg Television in London, Roubini stated: "The stock market is a bit ahead of the real macroeconomic and financial news." He also predicted that American house prices will fall as much as 20 percent in the next 18 months. The problem with Roubini's forecast is that it actually occurred on the morning of March 26, 2009.
  • The S&P 500 Index had closed the prior day at 814. It closed November 5, 2010 at 1,226, a price only (not including dividends) increase of 51 percent.
  • As to his forecast on home prices, the S&P Case Shiller Home Price Index stood at 140.06 at the end of March 2009. At the end of October 2010, the index was 148.59, an increase of about 6.1 percent 8.5 percent.
The problem with economic and market forecasts is that there are no good forecasters. Yet, every day the financial media broadcasts and prints forecasts from the latest gurus -- forecasts that are the financial equivalent of astrology. The media provides the forecasts, not because they have any value, but because they need you to pay attention -- that's the way they make money. Paying attention to forecasts is the way you lose money. They get away with it because the gurus are rarely held accountable for their forecasts.

Before you give any credence to the next forecast you hear, consider the following:
  • John Kenneth Galbraith was one of our most famous economists. Commenting on the ability of economic forecasters, Galbraith stated: We have two classes of forecasters: those who don't know - and those who don't know they don't know. I would add a third class, the one that probably constitutes the majority: Those who know they don't know but get paid a lot of money to pretend they do.
  • Michael Evans, who at the time was Chairman of Chase Econometrics (now known as IHS Global Insight) stated: The problem with macro [economic] forecasting is that no one can do it. HIS Global Insight's website (www.globalinsight.com) declares: "The global leader in economic and financial and market intelligence for over 40 years." The firm probably collects millions for providing insights on what Evans admitted no one can do.
  • And finally, a pretty smart investor named Warren Buffett offered this advice: A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting.
I offer the following advice: If you have to watch CNBC, make sure you have the mute function on.

More on MoneyWatch:
Forecasting Should Be Left to the Astrologers Why You Should Listen to Economic Forecasts with Caution How Much Value Do Economic Forecasts Hold? With TIPS, Should You Buy, Hold or Sell? Vanguard Bond Funds Are Not All Created Equal
Hear Larry Swedroe discuss current investment trends and topics every Sunday at noon on 550 AM KTRS in St. Louis or streaming via the KTRS Web site. Can't catch the show? Download the podcast via www.investmentadvisornow.com or through the Buckingham Asset Management podcast page on iTunes.
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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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