It's not the first time, but on many prior occasions I have been accused of getting too extreme with forecasts. My running forecasts of DOW 20,000, Nifty 10,000, Oil 300 dollars, Gold 10,000 dollars, Indian Rupee-USD sub-40 could also be considered extreme for the next 36 months.
With all the objectivity that we talk about and all the objectivity that investors seek, do we really need an extreme forecast? Surprise is a constant feature of the market and even ridiculous forecasts come with a probability. Remember “miracles”? Moreover when business planning can look at "What if" contingencies, why can't investors look at "what if" scenarios? Does it not force us to think out of the box? Prepare us for the unforeseen, for the uncertain.
Now mind it, it is all not irrational. Extreme forecasts are something that seems rare. It could be 100% up-move for DOW and Sensex in 36 months and 50% for a currency during a similar duration. Historically, all of Gold, Oil, Dow, Sensex, and INR-USD etc. have witnessed such large movements in periods of 36 months. Extreme forecasts as it seems are more regular than rare. This is why a Nifty move to 10,000 from 4,500 (January 2012 lows) till 2015 could be reasonable. The same logic could be extended to Oil $100 to $200 by 2015, Dow 12,000 to 24,000 by 2015, and Gold $2,000 to $4,000. The only problem here is that 100 per cent is just a thumb rule. Price action could overshoot or undershoot the 100 per cent in 36 months target.
Elliotticians find extreme forecasts very regular as price patterns work like clockwork. No wonder Elliotticians stick out their neck more often than conventional technicians. Another reason why the 100 per cent in 36 months is very regular can be also seen among inter-market pairs. If 90 per cent is the difference between the worst 20% portfolio of Sensex stocks and best 80% portfolio of Sensex top performers (The New Sensex), then it should be no surprise to see intra Sensex stock components diverging more than 100% in 36 months. In my paper on Time Fractals (SSRN), I illustrated how tight knit (high correlated) pairs like Exxon vs. Chevron could also deliver 50% annualised in a long-short strategy. The point I am making here is that there is nothing religious about an extreme forecast.
So, though every extreme forecast is out there we need some kind of filter of the ‘ridiculous workable forecast’ from the ‘ridiculous popular forecast’. This is where the intuitive and counter-intuitive filter comes in. If a forecast seems intuitive and correct, it is probably wrong. We have made our counter-intuitive bullish case on prior occasions. For us, Gold’s five times growth from $400 to $2,000 is an on-going leg, which should proceed from $2,000 to $4,000 and potentially $4,000 to $8,000.
Extreme forecasts doesn't need experts, it needs historians. It's just the behavioural bias that closes investors out of the game. Gambler's fallacy of expecting reversion to mean is trickier than it seems. Markets are always fulfilling extreme targets as investor psychology follows the Dow Theory, starting from disbelief about an extreme forecast, to shock that the forecast happened, to regret regarding missing all of the move.
In the end it’s easy to say, “Who knew the story regarding euro misery?” The extreme forecast was out there, it’s just that we did not want to see it. Extremities are a part of human society, wars too are very regular, and it’s just that we fail to wake up from an illusion of continued prosperity and peace.
The author is CMT, and Founder, Orpheus CAPITALS, a global alternative research firm
