‘Lies, damned lies, and statistics’: Forecasters are never wrong - Even when they are wrong.

Ok so this is not about trading or investing, but how easily could we apply the following to the many market forecasters, predictors, gurus and scribblers.

The following is taken from an article on the BBC website in relation to the appalling medium-term/long-range forecasting record of the British Meteorological Office (The Met Office). Full article can be seen here:  http://www.bbc.co.uk/news/science-environment-21967190.

To summarise; last spring the UK suffered a switch from extremely dry almost drought-like conditions to incredibly wet with heavy downpours and seriously flooding. The Met office had stopped publishing long-range weather forecasts after a series of terrible high-profile failures in recent years; however they continued to publish ‘secret’ advisories to government contingency planners. – The article relates to the prediction for spring last year, issued in March. The 3 month advisory stated:

•  "The forecast for average UK rainfall slightly favours drier than average conditions for April-May-June, and slightly favours April being the driest of the three months.”  

Fast forward over the next 3 months, and these were examples of newspaper headlines:

• ‘Wettest April in the UK for over 100 years’
•  ‘Areas of UK see three times their average rainfall in spring’
•  ‘UK environment agency: Three months April to June - More rainfall than at any time since records begun.’ (Which was in 1910).

A failing that is so completely obvious, that to even try to deny it would just be incredulous. – And yet, full marks to the Met Office’s chief scientist Prof Julia Slingo who says:

•  ‘Last year’s calculations were not actually wrong because they were probabilistic’.

Hhhhmmmmmm. Let’s just repeat the first part of that quote:  ‘Last year’s calculations were not actually wrong’. 

  – It remains me of a wonderful quote by Charles Darwin: ‘A Mathematician is, a blind man, in a dark room, looking for a black cat, which isn't there”.

It might just be more sensible for them to admit that Yogi Berra is right: 

Finally - In keeping with the theme. - Here is a fantastic video clip called 'African Rain'. Try listening to it first without watching. - Then watch it.

'Rain_Rain_Rain' image courtesy of Christian Southworth / FreeDigitalPhotos.net.

EU - Have they just scored an own goal?

This weekend's announcement by the EU, whereby they have imposed a haircut on the bank depositors of Cyprus, seems to me to be at first sight to be a massive own goal. Of course I accept I may be wrong, but having played a pretty good game in very difficult circumstances since the start of the European Sovereign Debt Crisis, it seems like they may have started something which puts everything before it at risk.

On one hand I think can understand what has happened to drive this move. - The people of the European creditor nations are 'fed-up' with the recent Status Quo: That is using the proceeds of their hard work, for which they pay their full taxes on, to bail out the profligate debtor nations, who’s workers receive generous state support for doing relatively less work, and then hardly paying any taxes. Then as if to make matters worse, they receive nothing but scorn and vitriol for bailing them out. - Political forces in the European Creditor Nations, or more to the point Germany, though influenced by other nations - in particular Finland, are re-shaping and this required a tougher response for this bail-out. - Cyprus has enabled the politicians a perfect opportunity: A small nation with little real political clout and where political strife and popular anger may not make the television 'Breaking News' bulletins as often or with such high profile as would be the case of other larger countries. - Though this could easily also be seen as a cowardly move, picking on a small nation with little political clout to appease popular opinion.  

However, in doing so the EU have possibly started something far bigger; a fire-storm, that could easily get out of control and undermine banks across the Eurozone, particularly within the debtor nations which have thus far they have been shoring up these banks. At the same time they are putting their own credibility at stake, and possibly unleashing uncontrollable political forces.
Picture the scene across any nation now that may at any time demand or require a bank bailout or a further bank bailout. What are prudent savers going to be doing? I am sure they are sensible enough not to be running to the bank to be withdrawing deposits, however who knows? Enemies of the Eurozone will be rushing to capitalise on this story, scaremongering will be ripe, it only takes a few photos or TV shots of queues building up outside banks to start a rush. - Perhaps it will not be a rush however, this does not mean it is not happening: Large depositors may be quietly moving their money from local banks to safer havens, or even solid shiny commodities that they can leave safely stored in their name somewhere. - This will not be purely a knee-jerk reaction, they will almost certainly be thinking that if this gets out of control there are 1 of 2 options open to the EU. - 1 is to re-consider this weekend’s Cyprus decision, which would seem the obvious step. However the EU’s credibility will be massively questioned, and whilst it seems easy to criticise this move as 'Stupid', the truth is this is a response to shifting political forces which played a part in shaping this, and it would be interesting to see how much room there is for a re-think.  2 - Is for it continue, if however suddenly huge cross-borders capital movements suddenly start becoming an issue, then I doubt that even the SNB could avert EURCHF diving below 1.2000 without some form of capital controls. - There are many other potential outcomes to this, but I do not want to even go there at this stage.

The initial response this morning in markets has been understandable, though perhaps not as dramatic as perhaps it could have been. - EURO lower on all crosses, but just back to last week’s levels, and off the worst levels as I write. Gold up, stocks down, bank shares somewhere around 3 – 4% lower.  At the moment, the market has purely re-marked prices, and is now in a wait and see mode……. Perhaps I am being more pessimistic than necessary, but, I am not typically a doom-monger, my cup tends to be half-full, and I certainly do not subscribe to Zero Hedge’s ‘the world is about to end’ doctrine. – But I must admit, this weekend’s events may just be the little grain of sand, which drops on to John Mauldin’s insecure mountain of sand, which triggers a much bigger collapse in the whole pile.

"Grunge Flag Of Cyprus" image courtesy of "creativedoxfoto" at FreeDigitalPhotos.net.
"Euro Sinking In Sea" image courtesy of "Stuart Miles"  at FreeDigitalPhotos.net.

USD - Good possiblity of further gains ahead.

This is very interesting – In my opinion we are seeing a good possibility of significant further gains for the USD across the board. 

Though with EURUSD at a pivotal zone, immediate direction is slightly uncertain. Holding above this level could signify a rebound, though a clear break though would be a blow and suggests to me EURUSD will head lower.  – Note: This is on weekly charts, so caution as verification may be needed, and intraday overshoots could be misleading.

See EURUSD weekly chart below.

What would be really interesting is if turns out that the move higher from the Head & Shoulder pattern of past 12 weeks have been a false/misleading breakout. – Often when that turns out to be the case, the market corrects back towards (and often hits) the head of the pattern, with a break below the right shoulder low (1.2660) usually being a key confirmation of this.

Here is an example of a similar turn of events on USD10 Year Yields in 2008-2010. (Though clearly on this example the head of the pattern was not hit, the emphasis however is on the consistency and size of the move lower).

Note: The break out of the right shoulder extreme has already occurred on the USD INDEX, though the fact that GBPUSD and USDJPY are part of these baskets would have contributed to the different dynamic there (See below)

I am not taking this as implying anything else for any other markets, currencies or indices. This is purely based on these charts. – Note however, the prior AUDUSD analysis continues to unfold……