Interest Rates? Wait, Where's My Lucky Coin...?
Interest rates? Bond Yields? Just Flip A Coin.
Albert Einstein dies and goes to heaven, where he
discovers that he has four roommates.
"Hello, Professor Einstein," says the first. "I hope you don't mind, but my IQ is only
"That's alright," says the great man. "We can always discuss particle physics."
"Delighted to meet you, Professor Einstein," says the
second roommate. "My IQ is only 140."
"Don't worry about it," Einstein replies graciously. "We'll just talk about mathematics."
"Hello, Professor," says the third. "I'm glad to meet you, but my IQ is only
"Think nothing of it," Einstein says. "We can discuss literature and art."
The fourth roommate, after some hesitation, says, "It's
an honor to make your acquaintance, sir, but my IQ is only 75."
"That's wonderful!" says Einstein. "Tell me — Which way are interest rates
We don't even want to tell you what some Wall Street
strategists get paid for predicting interest rates and the resulting trends,
because you'd faint if you knew.
Especially since first of all, those predictions aren't guaranteed (your
refrigerator is guaranteed for 12 months and you paid less than $1,000 for
that, retail), and second, those folks, more often than not, are wrong.
Since a bond can only go higher, lower, or do nothing, you
should be able to call it right 33% of the time without trying. But according to one 19-year-long study,
these "experts" correctly called the direction of change six months out in the
yield curve only 28% of the time.
And how do you think they did at predicting what the long
yield would be in six months? Within
four or five basis points? Fifteen
basis points? No; they were off an
average of 87 basis points. Take their
advice today, and a year from now you're poorer.
Wait, it gets funnier
Twelve-month forecasts were less than accurate, too. In late 1998, their average 12-month
prediction for the 30-year Treasury bond's yield at the end of 1999 was roughly
5.6%. What it ended up was 6.4%. A year later they predicted that by the end
of 2000, the yield would be 6.4%. As we
recall, the yield at the end of last year was 5.5% — 110 basis points under the
It's often the same with stocks, for the simple and
immutable reason that stock pickers travel in packs. Rather than attempting to forecast correctly and independently,
Wall Streeters evidently aim to agree with one another. (That way, nobody's feelings get hurt and if
they're wrong, they can all weep together.)
On Wall Street, the expectations of tomorrow are already
reflected in the prices of today; by the time a pick becomes common knowledge,
it's probably time to short it. Unless
an investor has superb timing, and can jump in at the low and out at the high
(or knows someone who can), it's getting hard to make real money by following