Found the aforementioned letter:
“HEADS I WIN, TAILS YOU LOSE”
Appeared in the Wall St. Journal, August 6, 1996
Your semiannual survey of economists has come and gone (July 1) and I was not included again. This is a shame because I have developed a complex economic model for predicting the yield on the 30-year Treasury bond. Much of the process is proprietary, but I will share some details. I first gather all sorts of economic data, including consumer confidence, nonfarm payroll, the Producers’ Price Index and those all-important commodity prices, with a special emphasis placed on gold, of course. I then contact Eleanor Roosevelt to get her thoughts on the mood of the Federal Reserve. And finally, and this is most important, I reach into my left pocket, pull out a 1993 Canadian penny and flip it.
Astute readers will no doubt argue that my model gets the direction of long-term rates correct only about half of the time. To these cynics I point out that there have been 29 surveys conducted since the Wall Street Journal began asking economists for their 30-year T-bond yield forecasts. The consensus estimate of these highly-paid economists for the 30-year bond has been in the wrong direction in 20 of these 29 surveys. Furthermore, 43 economists have participated in 10 or more surveys. Only 13, or 30%, have gotten the direction correct more than half of the time, with only one economist breaking the 60% barrier.
Interest rate forecasts are most important when the interest rate movements are large, and there is where my model shines. The yield on the 30-year Treasury bond has ended up or down more than 100 basis points during the six-month prediction period on ten occasions. The economists’ consensus forecast (and I use this term loosely) was in the right direction only twice. My model has predicted the right direction, believe it or not, in five of 10 periods.
I will ignore the Journal’s slight and provide my forecast to your readers anyway. The Canadian maple leaf is facing up, suggesting rates will decline. I noticed six economists predicted 30-year rates out to the second decimal place (for example, 7.29% instead of 7.3%). I too have a good sense of humor and therefore predict the yield on the 30-year bond will fall to 6.71%. Readers who desire future forecasts will have to purchase my newsletter.
Assistant Professor of Economics
Middlebury, Vermont Image: https://dl.dropbox.com/u/44760674/TD/Gifs/BOOMbaby.gif