Beware Of Forecasts - January 14 2019 EconVue Spotlight

Predicting the future is notoriously difficult, but that doesn’t stop the flurry of prognostications every January. We’ve gathered a selection of 2019 forecasts, including some predicting low probability events, because just imagining the unlikely can reveal horizons sometimes obstructed by conventional wisdom.

To provide context, I’ve included an article from the field of meteorology presented at the recent annual meeting of the American Economic Association (AEA) in Atlanta. Economists and meteorologists both deal with complex and chaotic systems, and have quite a bit in common. Evidently weathermen overestimate the probability of a typhoon relative to their own location.  Why this bias? The costs of underestimation are higher.

Predicting prices is even more difficult, although there is an industry dedicated to this effort. Over the past year cryptocurrencies have been a wonderful example of this problem, and I’ve cited a painful list of the major bitcoin price predictions for 2018.  To be fair, the recent volatility in more traditional markets was foreseen by very few analysts a year ago.

Even forecasts and analysis that prove to be incorrect can be instructive. I’ve included a mea culpa on the projected growth of gig economy employment by two eminent economists, as well as an article about the possibility that we have completely misunderstood the causes of the US housing crisis. The Federal Reserve recently published a paper that posits that long-term bond yields have no predictive value. Martin Wolf of the Financial Times questions whether China’s rise is inevitable. Olivier Blanchard, formerly of the IMF, said in a speech at the AEA that public debt has no fiscal cost. These would have been heresies just a few years ago.

The economics profession, as evident in Atlanta, has entered an intense period of soul-searching and reevaluation. Everything is now being questioned. MMT or Modern Monetary Theory says that governments that issue their own currencies cannot default, and that QE is just refinancing its debt to itself. All this matters of course because economics provides guidance to global policy makers. Rattled markets have also been searching for direction.

An unprecedented US government shutdown continues,  which in addition to its other effects, impedes the flow of some of the data that economists utilize.  At this point, 69% of bettors on Predictit think that the shutdown won’t end until January 18th or later.  One of my concerns is that the divided politics will create more unpleasant surprises in 2019.  I’ll be very happy to be wrong.

I hope you’ll also enjoy articles by our own EconVue experts, on the world outlook, Latin America, health care, and the Fed.

RESEARCH BY ECONVUE EXPERTS

2019 Outlook
Nikolai Tagarov

As in previous “year ahead” reviews I have published on EconVue, this is not intended as a prediction of how events will necessarily unfold in real life. My intent is above all to consider the main risks to the stability of the international political and economic environment in various regions of the world with which I am relatively familiar.

'Data Dependent’ Fed Will Change Policy Course If --and Only If -- Needed
Michael Lewis

Powell & Co. will not continue tightening if the economy falters. This should be self-evident. Fed officials repeat this utterly indisputable position at most every opportunity.

2019: Trends, Risks and Hard Questions in Latin America
R. Evan Ellis

I am sharing with  you my new article examining trends and challenges facing Latin America and the Caribbean as we begin 2019.  The work focuses on the reinforcing effects of the fragmentation and other changes in the criminal groups across the region, the advance of the PRC, and deepening political crises in Guyana, Venezuela, Honduras, and Guatemala.  The article also highlights significant developments and challenges in Mexico and Colombia as countries of concern.

Getting Precise about Precision Medicine: Balancing Hope, Potential and Cost
David W. Johnson

Definitions of precision medicine are anything but precise. For seriously ill patients and their families, precision medicine therapies provide a hope when all else has failed. They’re willing to risk long odds for the chance to improve or extend life, but they want health insurers to cover the costs.

STORIES IN OUR SPOTLIGHT

World

Typhoon forecasters in different cities systematically bias the predicted stormtrack toward their own city
Michael Clemens 1/6/2019 Twitter

What a cool paper at #ASSA2019. Costs of mis-forecasting are greater for hits than for misses.

How Aging Japan Defied Demographics and Revived Its Economy
Greg Ip 1/11/2019 Wall Street Journal

The very definition of economic and social resilience. Is using older workers a global trend?

Public Debt and Low Interest Rates
Olivier Blanchard 1/7/2019 AEA speech

Low interest rates imply that, not only public debt may have small fiscal costs, it may also have low welfare costs. You can use it, if you use it wisely. The beginning of a conversation?

The High Cost of “De-Risking” Infrastructure Finance
Howard Mann 12/26/2018 Project Syndicate

When the World Bank and others talk about de-risking infrastructure finance, they really mean reducing the risk for investors – and increasing the risk for governments.

How Asian companies are navigating the trade war
Kenji Kawase 9/19/2018 Nikkei Asian Review

Moving supply chains to Vietnam does not necessarily mean China is not involved.

U.S.

How Estimates of the Gig Economy Went Wrong
Josh Zumbrun 1/7/2019 Wall Street Journal

Two leading experts on the “gig economy” now say their estimates of its impact were too high, skewed by spotty data and the recession of a decade ago.

Rich Cities Created the Housing Shortage
Kevin Erdmann 1/6/2019 Wall Street Journal

What if our understanding of what caused the US housing crisis was completely wrong?

The Near-Term Forward Yield Spread as a Leading Indicator: A Less Distorted Mirror
Eric Engstrom and Steve Sharpe 1/2/2019 Federal Reserve Board

12-18 months-yes. But “yields on bonds beyond 18 months in maturity are shown to have no added value for forecasting either recessions or the growth rate of GDP.”

When will the shutdown end: Market expectations (65% on 18th or thereafter)
Menzie Chinn 1/9/2019 Twitter

So another week is the consensus.

Morgan Stanley: Here's S&P 500 Impact of Fed Balance Sheet Cuts
Lu Wang 11/11/2019 Bloomberg

According to Morgan Stanley, the Fed balance sheet reduction matters, and more than interest rates. "The current MBS runoff could translate to a 6 percent decline for these stocks this year, their estimates showed."

Who runs the world? The military-industrial complex is now run by women
1/3/2019 MSNBC

The CEOs of four of the five biggest defense contractors are women. Watch Ali Velshi break down who is running Northrop Grumman, Lockheed Martin, General Dynamics, Boeing’s defense wing, and weapons negotiations for the U.S.

Trade and Labor Market Dynamics: General Equilibrium Analysis of the China Trade Shock
Caliendo, Dvorkin & Parro 9/28/2018 Yale University

500,000 jobs were lost to trade with China from 2000-2007. Over 72 months about 7000 jobs were lost each month. During that period non-farm payrolls increased monthly in the range of 130,000- 137,000. So approximately a loss of 5% per month over this period.

China

The Future Might Not Belong to China
Martin Wolf 1/102019 Brad DeLong Blog

Nothing is inevitable.

Chinese consumers indifferent to diplomatic spat between China and Canada as "Canada Goose Boycott" backlashes
Gabi Verberg 1/3/2019 Whatsonweibo.com

Canada Goose is doing well in Beijing, despite recent diplomatic spats between the two governments. It seems Chinese consumers don't care.

How Big Is Apple's China Business?
Felix Richter, 1/10/2018 Statista

Apple’s China business has grown nearly twenty-fold since the company entered the Chinese phone market in 2010. In Apple’s fiscal year 2018, Greater China accounted for 20 percent of the company’s revenue, virtually unchanged compared to the year before.

The Stealth Superpower- How China Hid Its Global Ambitions
Oriana Skylar Mastro 1/9/2019 Foreign Affairs

To focus on this reluctance, and the reassuring Chinese statements reflecting it, is a mistake. Although China does not want to usurp the United States’ position as the leader of a global order, its actual aim is nearly as consequential.

Xi Jinping says Taiwan 'must and will be' reunited with China
1/2/2019 BBC

Are we underestimating the possibility of conflict over Taiwan?

Europe

Outrageous Predictions 2019: Germany enters recession by Steen Jakobsen
12/4/2018 Saxo Bank (YouTube Video)

Has Germany entered into recession?

One Russian in Four Lacks an Indoor Toilet, One of Many Signs There are Now ‘Four Distinct Russias’
Paul Goble  1/7/2019 Window on Eurasia

The reality of life in Russia today.

Where did their economies stand in 1973 when the UK joined what we now know as the EU and how do they rank globally now?
Robert Kimbell 12/26/2018 Twitter

The US and the UK have retained their rankings in the world economy. Individual members of the EU have fallen, including Germany since 1973.

Innovation

Here comes the New Year! Please stop irresponsibly predicting cryptocurrency prices!
Larry Cermak 1/1/2019 the Block Crypto

A great compilation of major Bitcoin price predictions for 2018 in major media. Most were wrong, but a few good calls and comments. 

From Commodity to Fiat and Now to Crypto: What Does History Tell Us?
Barry Eichengreen 1/2019 National Bureau of Economic Research

So-called stable coins are intended to bridge this gap, but whether they can be successfully scaled up and maintain their stability is doubtful. The one unit that can clearly meet these challenges is central bank digital currency. But there would be both costs and benefits of moving in this direction.

I Gave a Bounty Hunter $300. Then He Located Our Phone
Joseph Cox 1/8/2019 Motherboard

Your only option is to turn off cellular service and use only wifi if you don't want your location sold to third parties by your cellular carrier.

Self-Driving Cars Will Always Be Limited. Even the Industry Leader Admits it
Paris Marx 11/15/2018 Medium

Autonomous vehicles might be further down the road than we think.

How the farm bill could help sour a rural innovation renaissance
Vivia Graubard & Nathan Ohle 1/3/2019 Pacific Standard

The more rural the county in the US, the higher the level of sustainable entrepreneurship. With the addition of broadband access & innovative policies, will flyover country become the new hotbed of innovation? I think the key is millennial migration.