Riskon,ElectionforecastingandTetlock'sPrism

Stock markets are up, emerging market currencies are strong , US bond yields are right, gold is up and the dollar index is down. So apart from the slight puzzling move in gold one can safely deduce that risk on is the flavour of the day. The reason which is bandied about for the optimism is the renewed hope on the second stimulus package in the US where Treasury Secretary Mnuchin and House Speaker Nancy Pelosi are expected to have a discussion today. Though we have heard this story before, hope is hope.

On the currency side, the British pound jumped from 1.28 levels yesterday to trade at 1.2940 currently. Any positive development in the Brexit talks manifests as pound strength. The euro trades at 1.1745. In a statement yesterday, ECB Chief Christine Lagarde hinted that the ECB can also look to follow the Fed line on overshooting the 2% inflation target. What it essentially means is that rates will remain low even if we see some traction on the inflation front.

Now we will come to the topic of discussion today which is the first televised presidential debate in the US. The twitterverse is abuzz on who won the debate and the polls are out. Some of the political pundits who are in the business of forecasting have increased the odds of a Biden election by a few percentage points. This is important  because, as with any change, the market reconfigures its expectation of the future policy regime. Hence such forecasting becomes of immense value. But are these forecasts really of any use, what has been the track records of these “experts”?

Philip Tetlock confronts the same question in his 2015 book, Superforecasting: The art and science of prediction. Philip writes that the expert forecasts in all the major events starting from 1985 till 2010 (his period of research) has been no better than random chance. The fall of the Berlin wall, the collapse of the USSR, the US Presidential election results, major moves by NATO - all have been misforecasted by the experts. But all is not lost according to Tetlock, as there is a group of people who as per his controlled research setting were able to predict much better. He goes on to elucidate qualities of such forecasters. They are foxes compared to the so called experts and pundits which are hedgehogs. Foxes are adaptable, self critical, cautious and tolerant of complexity. They incorporate new information better and update their predictions. Hedgehogs on the other hand are confident, married to an ideology, think in terms of an orderly world with specific cause and effect and most importantly they are stubborn. The hedgehog predictions hence are more a reflection of their ideological moorings then an analysis of reality.

But Tetlock writes in the end that confident hedgehogs make better TV than self critical foxes and that is the reason for their appeal. In the US elections, where we have a very good test case in terms of a binary time bound event, it would be good to check all the forecasts and see them from the Tetlock’s prism. Maybe we will be able to find which forecasters are more likely to perform better.

Domestically, we saw the announcement of the H2 borrowing calendar where the borrowing number was kept the same as the previously announced i.e. 12 lakh Cr INR. This was good news for the bond markets. The benchmark 10 year bond yield opened at 5.96 against yesterday’s close of 6.01. The BOP data for India was also released yesterday showing a current account surplus of USD 19.8 bn for  Q1 FY 2021.