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Does Anyone Know?

That wise sage and Jedi master, Yoda, is credited with saying, "Impossible to know, the future is."  With that one sentence Yoda displayed more wisdom than a whole team of economists and markets pundits.  Economist, really important, big-time economists, the kind the federal government and large corporations turn to for insight, have about a 50% accuracy rate when it comes to predicting future interest rates.  That's about the same accuracy you would get from asking a chimp his opinion.  For example, various economists have been predicting a rise in interest rates for the past two years.  As of today, the ten year treasury bill is paying 2.14%, about 100 basis points below its rate of last year this time.  Of course, the market is throwing a hissy fit right now about Standard & Poors downgrading Uncle Sam's credit rating, and I realize that interest rates are historically very low.  They will inevitably go up at some point from here, but we do not know when, or how fast that will happen.  It would seem that government bond holders do not see an impending threat of that happening with rates as low as they are.  Only time will tell. 

Then there are the market gurus who were predicting in March of 2009 that the S&P 500 index would continue its fall all the way to 600!  Of course there are some so called "perma bears" who are always predicting that the stock market is going to crash.  Since this is their constant prediction, they prove to be right from time to time.  They were right in late '08 and early '09, and they got to trumpet their accuracy for a while.  We hadn't heard much from them until only recently, but they are back now, in full-throat roar with the market volatility of late.  Of course, a clock that doesn't run is still right twice every 24 hours. The same observation can be made regarding those permanent "Pollyannas" who see the market only going up.  Imagine the embarrassment of the poor guy who a few years ago wrote Dow 30,000 by 2008!  Now that was really bad timing.  He hasn't been on CNBC very much recently.

So, if anyone tells you anything about future moves in interest rates, or the equity and bond market, other than, "I really don't know where they will move to in the short term future," run!  No one has proven to be able to call moves in the market with any accuracy over any period of time.  Anyone can be right occasionally; all one has to do is to continuously make the same prediction because the markets, and interests rates, will move both up and down.  The approach I recommend is to be as prepared as possible for either outcome, and realize that over longer periods of time, equity markets have historically gone up.  To me this means holding a diversified portfolio of cash, bonds, and equities, and rebalancing occasionally so as to remain within our comfort zones for risk.  Likewise we should try to be psychologically prepared for the occasional "hissy fit" that the markets will throw our way.  It also means bearing Yoda's observation in mind as we hear the various pundits share their opinions.


Fly/Drive Safely

11 August 2011

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