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Why Are Consensus Calls On Interest Rates Almost Always Wrong?

Jul. 18, 2017 7:47 AM ETPLW, GOVT, EGF, TAPR, FTT, FIBR11 Comments


  • Since my venture into financial commentary a decade ago, I have questioned the veracity of consensus opinion and noted how it tends to be wrong.
  • I believe there is ample reason that the street gives little credibility whatsoever to the concept of falling rates.
  • The investing public needs to think for themselves and or align themselves with those that have demonstrated insight and independence over time.

A bubble is a product of feedback from positive price changes that create a ‘new era’ ambiance in which people think increasingly that prices will go up forever…Today’s bond market…is just the opposite of a new-era ambiance. Instead, the demand for bonds is driven by an underlying angst about the slow recovery and pessimism of the future…that’s not a bubble.” Robert Shiller

Over the past several years I used my newsletter to voice my concerns regarding the macro-economic landscape, while attempting to provide practical solutions for investors. Since my venture into financial commentary a decade ago, I have questioned the veracity of consensus opinion and noted how it tends to be wrong, especially in regard to interest rates. Of equal importance are the factors that cause a consensus to form and whether they are benign. In essence, I have questioned whether the consensus is truly formed through an amalgamation of individuals conducting impartial and empirical analysis, or whether these calls are simply a function of herd mentality or self-interest at work.

Many observers have an intuitive sense that economists and analysts kind of trip over themselves attempting to be part of a consensus. The rationale for this behavior may be defined as a personal risk management exercise for some knowing that going against the system has little personal upside potential.

Laurence J. Peter of “Peter Principle” fame suggests, “An economist, is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.” Many economists and analysts are very bright academics who do an excellent job, many others however, lack what I refer to as an “empirical intuitiveness.” I believe the use of evidence-based data is made stronger by instinctual or visceral capabilities. Forecasting may be more art than science. To paraphrase the economist Gary Shilling, consensus thinking is fully discounted in the market place thus, offers very little value.

This article was written by

Mr. Andres has spent the last 40 years as an innovator and leader in the world of fixed income investments. His leadership experiences across the broad spectrum of both tax-exempt and taxable products are unique and underscore the depth of understanding he offers in support of fixed income investors. He has played an active role in managing assets in fluid economic conditions – during both rising and declining rate environments – and in the face of rising geo-political events. His Wall Street career highlights include: National Sales Manager for Municipal Securities at Kidder Peabody; National Sales Manager at Merrill Lynch where he led Merrill’s efforts to finance both the Dallas-Fort Worth Airport and the Meadowlands Sports Complex; Director of Taxable Credit and Underwriting at Merrill, with responsibility for positioning, hedging, and risk management; and President – Merrill Lynch Mortgage Capital Corporation, with responsibility for all mortgage-backed securities trading, hedging, research, and investment banking. He utilized these leadership positions as a platform to further enhance the development of the modern bond market. Under Bob’s leadership Merrill Lynch underwrote the first billion dollar collateralized mortgage obligation (CMO), and he played a pivotal role in the development and growth of the “Tiger” product – the forerunner of all zero coupon securities. He received public recognition for introducing sophisticated hedging techniques to improve trading profitability. It was at this time that Institutional Investor featured Bob as one of three fixed income industry leaders. Bob’s post-Wall Street career began when he co-founded Martindale Andres & Company, a buy-side investment management organization focused on fixed income and small cap equities. He functioned as the firm’s President and Chief Investment Officer of Fixed Income, overseeing $1.2 billion in fixed income assets. Subsequently, Bob served as Chief Investment Strategist for Envestnet, a publicly traded investment solutions company serving more than 36,000 investment advisors and overseeing nearly $700 billion in assets. He is also the founder and editor of the Andres Review, a publication that seeks to provide intellectually honest and impartial economic and market commentary. His writings have gained wide distribution within the advisor community. Bob’s unique perspective and ability to explain the economic landscape and the arcane world of fixed income has gained him national recognition with the media. His has been featured in Barron’s, Institutional investor, and has appeared regularly on CNBC, Fox Business, and Bloomberg. Bob attended Columbia University where he studied Political Science and Economics.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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