Forecasting is for fools

Dror Marmor

The market has already priced in the expected and nobody foresees the unexpected, which is maybe why economists so often get their predictions badly wrong.

Meitav Dash chairman Zvi Stepak estimates that, "Apartment prices are expected to fall 10%-15% in the coming two to three years." The problem is that Stepak gave this forecast in July 2011 and apartment prices rose 11% and 19% in those two to three years respectively. By the end of 2022 they had leapt 95%.

This is not an attempt to doubt the professionalism and experience of Stepak, but rather a call to consider very cautiously the abundance of predictions that we are currently being fed. One of those predictions was from Stepak himself, who told "Globes" last week that "after there was a 20% increase in apartment prices this year, I estimate that there will be a decrease not far from that." At the end of 2021, by the way, Meitav estimated at best "a moderation in the increase in apartment prices in Israel is expected in the coming year", while prices actually jumped 20%.

Of course it's not just about real estate. While the main index on the Tel Aviv Stock Exchange, Tel Aviv 35, ends the year with a 10% drop, the closest forecast I found from the end of December 2022 was from Bank Leumi's economists, who estimated that the Tel Aviv 35 index would end 2022 up 3%. Most of the other economists estimated that we would see an increase in the index of about 10%. The same investment experts also expected the dollar to tread water in 2022, while the US currency actually soared 14%.

Nor is it just in Israel. Citigroup predicted, for example, that in 2022 we would see a "radical drop in energy prices." A special report stated that "We are especially bearish when it comes to energy prices - coal, gas or oil, in the next three years, due to significant oversupply." According to that forecast, in the fourth quarter of 2022 the price of a barrel of oil would be $59 and in the first quarter of 2023 it would fall further to $51, compared with $80 per barrel at the end of 2021. What is actually happening? A barrel of oil is currently trading at $83 - a 4% rise over the end of 2021.

At the moment most economists are adopting a particularly pessimistic line - there are plenty of headlines and declarations by experts such as "a global recession is inevitable", "house prices are on the verge of a sharp fall", "interest rates will continue to rise in the US and as a result here too" (all from interviews published in "Globes" over the past few days) - it's worth mentioning something else significant - one of the best known rules in investment assumes that the market has already price in expectations. What we don't know are the black swans that might suddenly appear and affect the prices of apartments, stocks, oil, etc., probably at Meitav and Citigroup they don't know yet either.

One can understand the desperate and natural need to know what the day will bring, certainly during such a gloomy period. At the same time, we must recall the wisdom of the Jewish sages who said that "prophecy was given to fools or babies." Perhaps also to those who want to advance their own interests. For example managers and owners of investment houses, who explain and try to convince us that if we have any extra money to invest, it is better to put it in their safe hands, and God forbid not to invest in an apartment, "just before the sharp falls." And you can be sure that there will be no shortage of excellent excuses as to why predictions for 2023 were wrong as well.

It's not just about the interests of commercial organizations, who want to create self-fulfilling prophecies. On January 3, 2022, the Bank of Israel published its forecast for the coming year. The Bank of Israel is also committed to targets (inflation within the 1%-3% range set by law) and above all that it has draconian tools that will help it achieve them (the interest rate, but not only).

Israel's central bank also took pains to point out that the forecast is not intuitive - "and is based on several models, on various sources of information and on judgmental assessments, including a central role for the DSGE - Dynamic Stochastic General Equilibrium model developed in its research division and based on microeconomic foundations."

It sounds smart and reliable. Except that in January 2022, the Bank of Israel research department forecast that inflation in 2022 would be 1.6%, the interest rate would end the year at 0.1%, or at most it would rise to 0.25%. As of November inflation was 5.3% - more than three times the forecast and the interest rate stood at 3.25% - 13 times the high forecast.

Published by Globes, Israel business news - - on January 1, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

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