Winnipeg Free Press - PRINT EDITION

If all the experts say it, it could well be wrong

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Being a professional financial pundit, I'm often asked how the markets will do. If only I knew, I'd be sipping a Mai Tai and eating peeled grapes on my private island.

But this is what I have learned: Markets never crash when everyone says they will. Take the stock market: How many people predicted in 2008 that stock prices would get crushed? How many predicted the housing market bubble would burst? How many saw a bubble?

Lots of people claim they did (as John F. Kennedy once said, success has many authors, failure few) and have made a name for themselves by repeating it. They tend to be economists or market strategists. Interestingly, I've tried to track down some of their supposedly prescient calls and can't, generally. When I have found some form of prediction of a crash, I've also found that they make a prediction every week, and so their odds of being right about one of them are pretty good over time.

But how many predicted market crashes and profited from their views? In other words, had the conviction to put their skin on the line? Some did, such as John Paulsen, who predicted the housing collapse and made billions. But he lost billions subsequently on other calls, so his predictive ability is questionable, notwithstanding his success.

Anyway, to return to the point: No one can reliably predict what a market will do. But as a general rule, when, as is the case today, economists and market strategists are almost universally bearish, markets don't get crushed. If you read stock market predictions attentively as I do, you'll find that at the end of last year, the general view was that markets would do poorly this year. Some, who wanted to attract a lot of attention, claimed they would tumble to new lows, worse than 2008.

Yet, the market is doing well, and earnings are OK. The U.S. economy is slowly recovering and the Europeans are starting to get serious. These little changes at the margins can make a lot of difference, and appear to be doing so.

Calls of a real estate crash in Canada are getting louder and louder. There is by no means a consensus, but even banks are starting to warn about a downturn, which probably means the gains of the past decade will peter out.

But again, severe crashes in real estate never happen when lots of people are warning about them, even if it's not everyone. And they basically never happen when interest rates are at historical lows.

The government and the banks are, in my view, skilfully letting the air out of the real estate bubble in this country, aiming for that "soft landing." Fortunately, they have room to continue a low-interest rate policy and can use policies like limiting amortization limits to curb over-enthusiasm. I wouldn't personally get into a bidding war on a house today, and I think you have to be a bit careful because eventually, higher rates will dent the value of pricey homes. But I doubt a crash is coming.

Similarly, the fact that so many pundits are cautious on the stock market and that so many investors are on the sidelines makes me feel more comfortable about shares. This is particularly true because even though profits aren't growing much, companies are raising dividends and the gap between yields on shares and yields on bonds favours shares in many cases, given how low interest rates are.

Bottom line: Sometimes the crowd of experts is a good indication of what not to do.

Fabrice Taylor is an award-winning financial journalist and analyst and author of the President's Club Investment Letter. Email him at:

fabrice.taylor@gmail.com

Republished from the Winnipeg Free Press print edition January 21, 2012 B5

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