RBA Rates and The Cup: Taking Predictions With a Grain of Salt

RBA Rates and The Cup: Taking Predictions With a Grain of Salt

It’s Melbourne Cup day, and in Victoria that means another public holiday. Having been so busy with the recent investment conference we staged in Port Douglas, I haven’t had a chance to look into the race too much.

In fact, I couldn’t even name one horse in this year’s event. Usually, I take the time look at the form and delude myself into thinking I might be able to pick a winner.

But this year, I think I’ll just look on. Australia’s favourite race is harder to pick than a proverbial broken nose. With such a big field, and such a long distance to run, so much has to go right for a horse to win.

If anything, I’ll take the old dart board approach. It’s just as effective as listening to the experts.

As I pointed out in my presentation at last week’s conference, there’s little point listening to the experts. That’s because they usually get it wrong. Not because they’re bad at their job. It’s just that no one can predict the future. If they can, it’s more due to luck than skill.

Still, this doesn’t stop ‘experts’ across a range of industries giving their views, from who’s going to win a horse race, to whether interest rates will go up today (more on that later).

And, despite knowing this deep down, we indulge the experts. Most of us simply search for information that confirms, rather than challenges, our existing thoughts. It’s called confirmation bias.

To give you an idea of the futility of putting too much weight on an expert’s opinion, check out the following quote. I used this in my presentation last week. It comes from Danny Kahneman’s brilliant book, Thinking, Fast and Slow. It details a famous study done by University of Pennsylvania professor Phillip Tetlock:

Tetlock interviewed 284 people who made their living commenting or offering advice on political or economic trends. He asked them to assess the probabilities that certain events would occur in the not too distant future, both in areas of the world in which they specialised and in regions about which they had less knowledge.

In, all, Tetlock gathered around 80,000 predictions.

Respondents were asked to rate the probabilities of three alternative outcomes in every case, the persistence of the status quo, more of something such as political freedom or economic growth, or less of that thing.

The results were devastating. The experts performed worse than they would have if they simply assigned equal probabilities to each of the three potential outcomes.

In other words, people who spent their time, and earn their living studying a particular topic, produce poorer predictions than dart throwing monkeys who would’ve distributed their choices evenly over the options.

In other words, take every ‘expert’ prediction with a grain of salt.

For example, I think the Reserve Bank of Australia will keep rates on hold today before ducking off to a Melbourne Cup luncheon somewhere.

But really, what would I know?

I’m not privy to any of their conversations. I have no understanding of how central bankers think, and I accept that they have a completely different model of how the economy works to me.

Yet I still ‘think’ they will stay on hold.

But what I’m really saying is this: If it was me making the decision, I’d keep interest rates on hold.

But it’s not me making the decision, so my opinion about what the RBA will do is little more than a semi-educated guess. Still, it’s all I’ve got to work with, so you may as well hear me out.

And anyway, I’d argue that you’re better of listening to someone who knows he could be wrong, rather than some pompous commentator who delivers his or her guess with steely conviction and unfounded confidence.

Here’s my (possibly faulty) rationale. The RBA got the housing boom wrong and doesn’t want to stuff it up any more. As Chris Joye wrote in last week’s Financial Review:

The Reserve Bank of Australia’s humiliation over its housing calls must be starting to hurt. 

The index it was relying on to justify repeated claims housing conditions were cooling — and that its August and May rate cuts would not reignite another round of aggressive price growth — has reported stunning capital gains across the nation’s largest cities.

Cutting interest rates now, when there’s no real evidence of a faltering economy, would just be silly. It would only push house prices higher and risk further reputational damage.

If there’s one thing I know about the kind of people that strive to the top of any bureaucratic organisation, it’s that they put a lot of stock in their ‘reputation’.

I’m guessing the RBA will want to play it cool for a while. New boss Philip Lowe will want to bolster his reputation by distancing himself from predecessor Glenn Stevens’ recent and unnecessary cuts. The way to do so is to do nothing for a while, and wait (and hope) for the criticism to blow over.

Let’s see what happens today. And I’ll guess that the US Federal Reserve will stay on hold too. It meets on 1–2 November. Although the Fed has said it’s apolitical, the chances of it springing a rate rise on the market a week before the election are very low indeed.

Now we’ve got those predictions out of the way, let’s turn to the Cup. I just had a quick squiz at the field and noticed Hartnell is running. I watched the amazing Winx make this horse look second rate in the Cox Plate, but it’s anything but.

Assuming it’s right to go the distance, Hartnell should be close at the finish. Might be worth a cheeky tenner.

But what would I know?

Cheers,

Greg Canavan,
For Markets and Money

Publisher’s Note: Today is a public holiday in Melbourne. Our office here in Albert Park is closed for the day. For this reason, Bill Bonner’s regular piece won’t run in today’s Markets and Money. We hope you don’t mind… Bill will be back tomorrow, along with your regular editors. Enjoy the race!

Greg Canavan

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing.

He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’.

Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors.

Greg Canavan

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