Economic Forecasting: Lakshman Achuthan's Evolving Recession Call

The Sham of Predicting the Economic Future

Please note: this article on economic forecasting was originally published in a slightly different format in the 12/12/2011 issue of The Weekly Compounder.

I'm going to share three video links with you and let you decide for yourself whether someone like Lakshman Achuthan of the Economic Cycle Research Institute is actually providing useful information or just generating a lot of self-promotional noise.

Economic Forecasting Video #1

The first video, which I had originally shared with Weekly Compounder subscribers on 10/24/2011 - is a September 30th appearance by Achuthan on Yahoo's "The Daily Ticker" in which he very clearly stated that a U.S. recession was both imminent and unavoidable, that the "negative feedback loop" had already begun and was unstoppable.

When asked on the timing, Achuthan very clearly suggests that the recession was already in place or could begin in the next month or two.

(I found his self-assuredness to be off-putting and suspect, and shared my opinion that honesty and certainty aren't always the most compatible of characteristics).

Economic Forecasting Video #2

The second video is a piece posted by Morningstar on 12/1/2011. It's not really an economic forecasting video but rather one that simply gives a good overall summary of then current U.S. economic trends - which, in contrast to Achuthan's call, appear to be producing a positive feedback loop, not a negative one.

Economic Forecasting Video #3

Finally, the third video is Lakshman Achuthan again. This was from an appearance on 12/8/2011 appearnace on Bloomberg where he was still maintaining his U.S. recessionary call (and his smarmy, self-assured demeanor).

But he seems to have subtly redefined the terms of his original prediction. Maybe it's not so subtle - now he's basically giving himself a full year for the U.S. recession to appear (and the positive data he doesn't like - which he previously included in his list of an expected "negative feedback loop" - he terms "coincident or short-leading indicators."

There's also a discussion early on how amateurs (i.e. those of us who aren't as smart as these two guys think they are) focus on the timing of the call, rather than the call itself.

How Never to be Wrong Economic Forecasting

ARGH! That kind of self-serving and dishonest logic irritates me to no end. What good is a prediction, if you are completely clueless on the timing? Achuthan had no shortage of confidence on the timing in that first video, but now if we question the validity of that call, we're accused of being "amateurs."

Don't get me wrong - I'm not saying there will not be a recession in the U.S. in the intermediate future. And I'm not saying there will be one either. I simply don't know.

Eventually, of course, Achuthan will be right as long as he keeps expanding the time horizon (and I'm sure he'll backdate and adjust the original call so that he can still claim that his organization has never given a "false alarm").

It's funny though - Achuthan's prediction seems to me very similar to my naked PEP puts (as of last Friday, they're now finally out of the money) that I've been adjusting and rolling month after month.

The beauty of writing puts, is that the timing (of the underlying share price) really isn't that important. . . unlike the economic forecasting racket where I've always naively assumed that timing does matter.

Follow @LeveragedInvest