"Rates to Rise, If They Don't Fall'

By DAVID MOON, Moon Capital Management.
September 30, 2007

Billionaire T. Boone Pickens is one of the world's experts on oil and one of the richest people in the world. His oil and gas interests have earned him enough money to become one of the country's most prolific philanthropists. The Chronicle of Philanthropy named him as the fifth largest charitable giver in 2005.

Pickens knows a little about the oil industry. He predicts that oil prices will hit $90 a barrel before year-end.

Larry Kudlow is a former economic advisor to Ronald Reagan and a commentator for CNBC. Both he and an oil company CEO on his show recently made a compelling case for $45-a-barrel oil in the near future.

It reminds me of the old accountant joke: 'What's 2 plus 2?' Correct answer: 'What do you want it to be?'

People love predictions. If you want to get on television, take a stand about something. It really doesn't matter if you're right; it only matters if you're passionate. Just look at any of the cable argument shows.

In our industry people constantly want us to make predictions about the stock market or interest rates or the economy. I'd rather not. First, short-term changes in those variables have limited influence on our long-term investment decisions.

But most important, it can't be done ' not successfully anyway. But at parties, in the restroom, on the street, everybody wants to know, 'What's this economy going to do?'

Let's ask the real experts.

USA Today surveyed 56 economists this year who believed that the risk of a recession in the following 12 months was just 4 percent. The Wall Street Journal surveyed a different group of 52 economists ' obviously a more pessimistic lot ' who put the odds at 36 percent, almost ten times as great as the USA Today crowd.

I suppose color graphs and short articles make a person optimistic.

Folks always want to know how the stock market is going to perform this year. Well, in graduate school we learned that the stock market goes up about 10.5 percent a year. If someone just pinned me down and forced me to make a prediction, that one would seem to be pretty safe.

Wrong.

In the last 50 years, the return of the S&P 500 has fallen more than ten percent outside the average return more than 60 percent of the time. It has never returned 10.5 percent. The market is seldom average.

Like the football fans spending unproductive hours around the water cooler during Georgia week, you can find someone to predict about anything you want to hear. CNBC has to fill 168 hours of programming each week. And like many of those football conversations, a lot of the folks on CNBC don't know much about their topic either.

Perhaps the best economic prediction I've seen in print was the headline of an article in Barron's several years ago: 'Rates to Rise, If They Don't Fall.'

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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