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Business/Finance See other Business/Finance Articles Title: My 2016 Forecast My 2016 Forecast By Jim Rickards This time last year Wall Street was telling you that the Fed would raise interest rates in March 2015. After March, the street moved its forecast to June. After June, the street moved its forecast to September. Now that September has come and gone, the street is talking about a rate increase in December. Hope springs eternal! But, hope is not analysis. Wishful thinking does not make a forecast come true. I was one of the few analysts who had this right from the start. You can look back to our archives… or listen to my CNBC interview from Thursday, November 20, 2014, where I said the Fed would not raise rates in all of 2015. Why was this so plain for us to see when almost every analyst on Wall Street saw the opposite? The key is understanding the flaws in the Fed’s forecasting models… and using the right ones, instead. The Fed uses obsolete partial equilibrium models, mean reversion, and regressions from over thirty recovery cycles since the end of World War Two. The problem is that the economy is not an equilibrium system; it’s a complex system. Also, we are not in a cyclical recovery, we are in a growth depression, the first since the 1930’s. Once you internalize these flaws in the Fed’s analytic modalities, it’s straightforward to take the Fed forecast and assume the opposite. If the Fed sees inflation, we’re more likely to have disinflation or deflation. If the Fed sees tightness in labor markets, we’re more likely to see slack. If the Fed sees 2.5% growth, it’s safe to assume something closer to 1.9%. And so on. Where you can believe the Fed is when the say they’re “data dependent.” The Fed may have obsolete models and bad forecasts, but they’re not stupid. They watch the data like the rest of us. Still, the problem with bad forecasts and data dependence is that you’re always surprised. You never see it coming. That’s the Fed’s biggest problem these days. The Fed keeps talking tough on rate hikes (based on bad forecasts), but then backs away from raising rates (based on weak data). It’s no wonder investors are confused and markets are volatile. Worst of all, the Fed’s credibility is now in shreds. What’s next? Using my inverse probability method I’ve formed a new forecast for 2016… The economy will remain weak. We’re probably heading into a global recession in 2016 and the U.S. economy is certainly not immune from the effects of that. The Fed will continue to talk tough about raising interest rates based on their flawed models. This tough talk will keep the dollar strong, which just makes the Fed’s problems worse. A strong dollar turns the U.S. into a sponge for all of the deflation in the world. This counterproductive combination of weak data and tough talk will continue for a few more months. Eventually even the Fed will see the light. By early 2016, we expect the Fed to throw in the towel on rate hikes and begin to talk about easing. This will probably take the form of reinstating forward guidance in FOMC policy statements. Forward guidance was abandoned in March 2015 when the Fed removed the word “patient” from their statements. They can put the word “patient” back in, or maybe an equally evocative synonym like “forbearing.” The exact word doesn’t matter. Fed insiders will call The Wall Street Journal, explain what they mean, and the Journal will tell the world what to think. The important thing is that the Fed will have blinked. After that we’ll be into election season and the Fed will probably be on hold until December 2016 to avoid getting caught in the political crossfire. If the Fed’s easing moves in mid-2016 produce stronger growth and some inflation, perhaps we’ll see a rate increase in late 2016 after the election. Still, if the global recession is worse than expected, even late 2016 may be too soon for rate hike. The time to raise rates was 2010 or 2011 when the weak dollar was giving the U.S. economy a tailwind. The Fed blundered by not raising rates then. If they had, they’d be in a position to cut them now when the economy could use a lift. Two wrongs don’t make a right. The 2010 blunder is no reason to raise rates now. The Fed’s next move will be to ease. All the best, Jim Rickards for The Daily Reckoning P.S. I did not authorize this investigation. click2.dailyreckoning.com...Q9dzJ6eGJYJmc9MA./AQ/ZaYn But after looking at it, I fully endorse the contents of this Web page. In this age of extreme market volatility, the contents of this investigation couldn’t be more timely. I encourage you to visit this Web page right now and decide for yourself. Poster Comment: I have little hope for 2016. If Obummer has his way, we will be under the "jack boot" of his alphabet agency thugs. Wish I had $1,500 lying about so I could sign up for this stuff with Rickards. Post Comment Private Reply Ignore Thread
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