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Top money minds give '06 the Eagle eye

Updated: May 3, 2013 12:14PM

Every January a group of the smartest money minds in Chicago gets together for a luncheon sponsored by Free Market Inc., an economic consulting firm that provides data analysis and insights for institutional money managers. Host Michael T. Lewis tallies the forecasts of the 18 guests, who are asked to make predictions of the high, low, and closing numbers for the Dow, Nasdaq composite, federal funds interest rate and the 10-year Treasury note.

The competition for the Eagle statuette is fierce, as individual scores in each of the categories are ranked to the decimal point, and adjusted by "mean error & standard deviation." Category winners get a tacky, homemade certificate, which I've actually seen displayed in some money manager's offices! In the nearly 20 years of this contest, there have been a lot of ups and downs.

The real bragging rights go to the overall winner, who this year is well-known forecaster Jim Bianco of Arbor Research, frequently quoted in the national media. I'll share his specific forecasts for the coming year, but perhaps of equal interest is the roundtable discussion where each participant gets a chance to share his or her reasoning for the numbers being submitted to the contest.

What worries money managers

The commentary is as interesting as the numbers. For instance, Lewis himself raised the issue of how we measure inflation by focusing on the popular term "core" inflation, which excludes volatile energy and food items.

Lewis calls the term a "tragedy of economics." Volatile or not, energy and food prices have a large impact on the economy, and he says it's a mistake to ignore that influence.

Economist David Hale is a friend of Ben Bernanke, incoming Fed chairman, who certainly isn't making any public predictions. But Hale figures that a slowdown in housing inflation during 2006 will give the Fed some room to ease (drop rates) later in 2007. Hale figures higher rates between now and then will slow housing borrowing.

Still, he's no housing bear, pointing out that since the Depression the United States has never had a national decline in housing prices, in spite of drops in individual markets such as California in the early 1990s.

I found it interesting how frequently the participants referred to Iran, not Iraq, in terms of potential impact on the economic outlook. Some factored in a confrontation over Iran's nuclear energy plans. But money manager Sy Lotsoff figures that Congress might give the president authority to take action, which could scare that country's rulers into negotiation.

Everyone had an opinion on oil prices, noting that the previous year Jim Bianco's forecast of an oil price over $55 a barrel had been startling. Now, several were factoring into their forecasts the impact of oil approaching or exceeding $100 a barrel in 2006.

Perhaps most astonishing, no one in the group was forecasting a recession. Some thought GDP growth might slip to around 2 percent by the end of the year, while others stuck with forecasts around 3.5 percent (compared with an average of 4.1 percent growth over the last two years.)

If someone had a crystal ball a few years ago and had forecast that the Fed would raise short-term interest rates 13 times, and that oil would be at $70 a barrel, and that the federal budget deficit would exceed $400 billion, you'd definitely have figured the economy would be staggering into recession by now.

Instead we have interest rates on 10-year bonds at only 4.37 percent -- actually flat or below some shorter term rates -- and an economy that is still growing.

Bianco simply says that 2006 is likely to be a continuation of 2005, though with slightly slowing growth. He figures short-term rates will remain higher than long rates all year long, cutting into the profitability of the financial services sector.

Dow at 11,500?

Still, he prognosticates that the Dow could rise as high as 11,500, and that the Nasdaq will end the year around 2300. And he figures we'll live with oil around $70 a barrel -- a price driven by demand and necessary to encourage more exploration and production.

Of course, all those forecasts could go out the window in the event of an unexpected terrorist or health threat. But we've weathered some of those in the past, as well as all those interest rates hikes, and our economy remains strong.

The "smart money" doesn't seem worried. Maybe that's the best indicator of all. And that's The Savage Truth.

Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.

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