Can predictions on currency depreciaction be any more accurate than those of the stock market?

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Lauretta
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Can predictions on currency depreciaction be any more accurate than those of the stock market?

Post by Lauretta » Wed Sep 19, 2018 11:04 am

I've come across this video where Dalio speaks of the economy as of a machine, governed by law of cause and effect.
https://www.youtube.com/watch?v=Nm0m62reFuY
I know that Bogleheads believe that the stock market is unpredictable, but I was wondering whether other forecasts, such as the one on currency depreciaction Dalio makes at about 12:15 (of the dollar likely losing about 30% in 2020) can be any more accurate? (If you are a non US investor, invested in and MSCI world ETF, the consequencies in terms of your local currency would be pretty catastrophic if this prediction were true)
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Re: Can predictions on currency depreciaction be any more accurate than those of the stock market?

Post by nisiprius » Wed Sep 19, 2018 12:12 pm

Lauretta wrote:
Wed Sep 19, 2018 11:04 am
...I've come across this video where Dalio speaks of the economy as of a machine, governed by law of cause and effect...
I personally believe that the atmosphere, unlike the economy, really is a machine, governed by the laws of cause and effect. And yet, yesterday, Accuweather predicted "no precipitation for 120 minutes," and I went for a walk, and got drenched.
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Re: Can predictions on currency depreciaction be any more accurate than those of the stock market?

Post by asif408 » Wed Sep 19, 2018 1:41 pm

I would say no. The only thing that can probably be said is that there tends to be cyclicality in performance of currencies, so since the dollar has been appreciating most of the last 7 years against other currencies around the world, at some point the trend will likely reverse. When and what path it will take, however, is much more difficult to predict, so I'm not sure how you can time it if you can't say when and know the path.

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Re: Can predictions on currency depreciaction be any more accurate than those of the stock market?

Post by Thesaints » Wed Sep 19, 2018 1:43 pm

“Currency depreciation” you mean “inflation”? It is notoriously very hard, if not impossible, to forecast accurately, but we can safely say that the 30% in less than two years mentioned is pure rubbish.

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Re: Can predictions on currency depreciaction be any more accurate than those of the stock market?

Post by randomizer » Wed Sep 19, 2018 1:52 pm

Seems just as unpredictable to me. Even when you think something might happen, or is likely to happen, knowing when and how much it will happen is still not that far removed from a monkey throwing darts at a dartboard.

Books like "Manias, Panics, and Crashes: A History of Financial Crises" make it clear that things are always heading south (or north) somewhere, and somebody is always getting caught on the back foot. Most of the people who are "right" about these things can't really show that their acumen is due to much more than luck.
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Re: Can predictions on currency depreciaction be any more accurate than those of the stock market?

Post by Lauretta » Wed Sep 19, 2018 2:09 pm

Thesaints wrote:
Wed Sep 19, 2018 1:43 pm
“Currency depreciation” you mean “inflation”? It is notoriously very hard, if not impossible, to forecast accurately, but we can safely say that the 30% in less than two years mentioned is pure rubbish.
No I think it's basically the USD index, i.e. how strong the US is relative to other currencies. Dalio talks of debt and how the dollar will weaken. The thing is, he speaks with a lot of confidence, as if these things could be understood and predicted to a certain extent.
So if you have 50% of your stocks in US stocks (if you have a global market cap allocation) and you live in Europe so that you spend money in euros for goods and services where you live, a 30% drop of the dollar relative to the Euro has a big impact.
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Re: Can predictions on currency depreciaction be any more accurate than those of the stock market?

Post by Valuethinker » Thu Sep 20, 2018 10:19 am

Lauretta wrote:
Wed Sep 19, 2018 11:04 am
I've come across this video where Dalio speaks of the economy as of a machine, governed by law of cause and effect.
https://www.youtube.com/watch?v=Nm0m62reFuY
I know that Bogleheads believe that the stock market is unpredictable, but I was wondering whether other forecasts, such as the one on currency depreciaction Dalio makes at about 12:15 (of the dollar likely losing about 30% in 2020) can be any more accurate? (If you are a non US investor, invested in and MSCI world ETF, the consequencies in terms of your local currency would be pretty catastrophic if this prediction were true)
The academic literature on XR forecasting suggests there are no easy ways to forecast.

Practitioners believe there are ways of making money.

To the extent that abnormal profits are made in FX, they probably arise from the fact that there are non financial participants in FX markets.

These would include:

- companies importing and exporting goods & raw materials, services
- tourists & business people travelling
- Central Banks seeking to manage "Dirty Floats" and hold XR within tighter bounds than the market does

If you have visibility of those flows, you can probably trade against them. There have been scandals regarding same - front running of clients.

Dalio? No particular reason to believe he has a better forecast than anyone else.

Financial markets is not nuclear physics - there are not reliable cause-effect relationships and properties.

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Re: Can predictions on currency depreciaction be any more accurate than those of the stock market?

Post by Valuethinker » Thu Sep 20, 2018 10:23 am

Lauretta wrote:
Wed Sep 19, 2018 11:04 am

I know that Bogleheads believe that the stock market is unpredictable, but I was wondering whether other forecasts, such as the one on currency depreciaction Dalio makes at about 12:15 (of the dollar likely losing about 30% in 2020) can be any more accurate? (If you are a non US investor, invested in and MSCI world ETF, the consequencies in terms of your local currency would be pretty catastrophic if this prediction were true)
Note that many US companies have foreign subsidiaries - the translation effect would drive up their profits, compensating for the devaluation in their stock price (assuming the Price to Earnings Ratio of the stocks remained constant).

US companies which are genuine exporters do even better. Somebody like Boeing (or Microsoft). Steelmakers etc. are going to be in better shape.

This a 30% fall in USD is not likely to be catastrophic for holders of the world index. The *cause* of that devaluation is more of an issue -- depends on political and/or economic causes of same.

In your shoes I'd worry more about Italy. The Italian government bond market will have a tipping point, that if crossed, leads to another crisis for the Eurozone. And I still have a lot of concerns re the financial position of Italian banks (without having studied the issue in any detail).

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Re: Can predictions on currency depreciaction be any more accurate than those of the stock market?

Post by Lauretta » Fri Sep 21, 2018 8:56 am

Valuethinker wrote:
Thu Sep 20, 2018 10:23 am


In your shoes I'd worry more about Italy. The Italian government bond market will have a tipping point, that if crossed, leads to another crisis for the Eurozone.
yes I don't own any Bpts (except perhaps in some structured products that I own in small amounts).
Would such a Eurozone crisis be likely to affect also EU stocks or just bonds?
I understand that sentiment in the stock market is much more optimistic in the US than in Europe, and that as a rule of thumb, the more people are optimistic about the market, the more it's likely that future returns will be poor. By contrast many people have negative sentiment about the EU at present so that perhaps this points to potential high returns. (I am saying this because a friend of mine recently chatted to an active manager managing a US fund, who thinks that Europe is more promising because of sentiment, in spite of the fact that he himself manages a fund investing in US stocks).
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Re: Can predictions on currency depreciaction be any more accurate than those of the stock market?

Post by Valuethinker » Fri Sep 21, 2018 9:14 am

Lauretta wrote:
Fri Sep 21, 2018 8:56 am
Valuethinker wrote:
Thu Sep 20, 2018 10:23 am


In your shoes I'd worry more about Italy. The Italian government bond market will have a tipping point, that if crossed, leads to another crisis for the Eurozone.
yes I don't own any Bpts (except perhaps in some structured products that I own in small amounts).
Would such a Eurozone crisis be likely to affect also EU stocks or just bonds?
I am guessing you meant BTPs? Italian Treasury Bonds?

http://www.dt.tesoro.it/export/sites/si ... ummary.pdf

Oh it would blow the stock markets out, too. In particular the financials and some domestic stocks in the southern tier.
I understand that sentiment in the stock market is much more optimistic in the US than in Europe, and that as a rule of thumb, the more people are optimistic about the market, the more it's likely that future returns will be poor. By contrast many people have negative sentiment about the EU at present so that perhaps this points to potential high returns. (I am saying this because a friend of mine recently chatted to an active manager managing a US fund, who thinks that Europe is more promising because of sentiment, in spite of the fact that he himself manages a fund investing in US stocks).
The US may be subject to investment euphoria. Countries like Brasil and Russia did well (after horrible performance) when certainty increases (Brasilian president was convicted etc).

I think it's very hard to price these things - you can wait a long time, and suffer a lot of pain, waiting for the market to agree with you.

The issues of the balance sheets of Italian banks are well known but if things get worse for Italy, they will get worse. A lot worse. That's the problem with future contingencies - the market can only apply a probability, then if the event actually occurs, there's another leg down (or up).

Italy normally "muddies through". But the usual coalitions of technocrats + politicians that run Italy, are not running Italy-- or at least are not forming the government. Populist solutions are possible. So, too, the risk of serious policy mistake - either by the Italians, the EU or the German government. Any one of the above could precipitate the next Eurozone crisis.

Shrug. I tend to basically just "stay the course" because I don't have a better visibility of this than anyone else.

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Re: Can predictions on currency depreciaction be any more accurate than those of the stock market?

Post by Lauretta » Fri Sep 21, 2018 11:46 am

Valuethinker wrote:
Fri Sep 21, 2018 9:14 am

I am guessing you meant BTPs? Italian Treasury Bonds?
yes I meant I don't own BTPs (as you see I couldn't even remember their name ;-) :D )
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Re: Can predictions on currency depreciaction be any more accurate than those of the stock market?

Post by JackoC » Fri Sep 21, 2018 1:00 pm

Lauretta wrote:
Wed Sep 19, 2018 11:04 am
I know that Bogleheads believe that the stock market is unpredictable, but I was wondering whether other forecasts, such as the one on currency depreciaction Dalio makes at about 12:15 (of the dollar likely losing about 30% in 2020) can be any more accurate?
The question isn't whether anyone knows the future realized outcome of stock or currency values. Nobody does, and I don't think Dalio thinks he does.

The question is whether currencies can have a non-zero expected return. If stocks had a zero expected return, nobody BH or otherwise would invest in them. So prudent stock investing must include 'prediction' at least to the extent that positive is more likely then negative return.

You can make arguments why you believe the expected return of currencies is zero. You can point to periods in the past where it netted out to zero. But the issue of 'convergence' relative to a now strong USD is not as simple as saying 'you can't predict the future'. You can't rule out on any simple first principal an argument that says the USD is fundamentally more likely to go down than up against other currencies in the medium term, particularly emerging market ones. Doesn't mean you have to agree with that argument in the specifics though.

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Re: Can predictions on currency depreciaction be any more accurate than those of the stock market?

Post by Mursili » Fri Sep 21, 2018 7:57 pm

nisiprius wrote:
Wed Sep 19, 2018 12:12 pm
Lauretta wrote:
Wed Sep 19, 2018 11:04 am
...I've come across this video where Dalio speaks of the economy as of a machine, governed by law of cause and effect...
I personally believe that the atmosphere, unlike the economy, really is a machine, governed by the laws of cause and effect. And yet, yesterday, Accuweather predicted "no precipitation for 120 minutes," and I went for a walk, and got drenched.
nisiprius, it is appropriate that your image is that of a butterfly. That is the metaphor used to describe unpredictability in weather events for some time. Yes, the atmosphere is a machine that obeys certain laws where the equations are actually relatively straightforward to write down. Yet we still cannot solve those equations sufficiently well to prevent you from getting wet on your walk.

I can't imagine how much harder it is to predict complex phenomena that include humans making rational and emotional decisions.
Last edited by Mursili on Sat Sep 22, 2018 9:21 pm, edited 1 time in total.
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Re: Can predictions on currency depreciaction be any more accurate than those of the stock market?

Post by JackoC » Sat Sep 22, 2018 9:56 am

nisiprius wrote:
Wed Sep 19, 2018 12:12 pm
Lauretta wrote:
Wed Sep 19, 2018 11:04 am
...I've come across this video where Dalio speaks of the economy as of a machine, governed by law of cause and effect...
I personally believe that the atmosphere, unlike the economy, really is a machine, governed by the laws of cause and effect. And yet, yesterday, Accuweather predicted "no precipitation for 120 minutes," and I went for a walk, and got drenched.
Right, which illustrates the real v bogus question. The real question is whether as a farmer growing a crop that requires at least 25 inches of rain a year whether I can form any expectation as to how much rain there will be this growing season. If I take 'unpredictable' to mean that I can make no inference about that, because 'it's unknown', how could I farm?

Likewise investing in stocks if I have no idea whatsoever of the expected return, on what rational basis would I commit my money? I believe it's confusing to call estimates of expected return 'predictions', a seemingly routine muddying of the waters on this forum. But you must make some inference about the future to invest in anything, deny it as much as anyone wants to.

The relevant question for currencies is whether they have a non zero expected return. It's not predicting what they are going to go tomorrow or any given day or year. An analogy to weather reports not always being correct gets us nowhere in determining whether it's reasonable to infer a positive expected return to (particular) currencies v USD given today's starting conditions (relative purchasing power, etc).

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