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First you make the forecast. Second you invest according to your forecast. Third you tell your friends. Fourth you tell everyone. Fifth you sell your investments. Sixth, you repeat.

(I have no idea if banks do this.)

On second thoughts, I think the key question is: how accurate do you think your forecast is, vs how accurate everyone else thinks your forecast is. If everyone else thinks your forecast is as accurate as you think it is, you should buy, then release your forecast, then immediately sell, because there are no more profits to be made.

If it was a stock, and they believed people believed their forecast (e.g. Goldman-Sachs saying AAPL will go to $X), then I'd be tempted to say they are trying to manipulate the market for fun and profit, but that seems like a long shot in the FX market.

Large banks need to be thought as serious. Producing that kind of work is a cheap way to gain a public reputation from something you already need. Costless marketing.
And they have other uses: At Laval in the 70's, the ECN dept always big boxes of research papers and monthly newsletters sent by banks ( most stopped in the 80's due to cost but the intertubes have amde distribution cheap again.) I was an avid reader and it was one of the factors that sent me from Physics into Economics.
I remember an assignment given out by Pierre Fortin. It was rather hard. It reminded me of something I have recently read. Inded it was straight from a discussion in ( I think a Citibank letter). We used it to solve the problem and our team, usually a B+A- got an A++ while the usual A+ tems got a B or C. We had to explain how we did it and there were protests that we had "cheated".
Pierre simply answered that a pro does his research and everybody should use the material the dept. provide..By the next assignment,things got back to normal and we got our usual B+...

Lesson to students: read the newsletters. In fact,a lot of Cegep Econ teachers in Québec use the Desjardins daily,weekly and monthly letters not only as teaching aid but as a model for students reports. They are very good

I think it at least 75% about marketing/sales/prestige. It enables salesmen on the trading desk to call their clients and say "did you see what our Chief Economist wrote this morning, here is an idea of how you can trade that with us..."

Banks make a lot of money from fees earned on trades placed by clients, not just trading for their own account. Anything that drums up interest in markets and hence more trading in general = more money for the bank.

Oops, I'm not very observant. Name_withheld just said essentially the same thing.

I saw the post title and immediately thought "Bingo - they don't." Consider why a forecast is made in the first place.

I do not work in or for the banks but I presume foreacsting the exchange rate and inflation are not the only forecasts they make. These are donated to the public to demonstrate competency.
Do you think the banks will make freely available the forecast for each of the components that go into the aggregate? BMO forecasts a drop in the dollar - so should people (gov't / industry / etc) invest in commodity resource development? Or, should you first hire an economic forecaster with proven expertise and ask them for advice?

Nick: "First you make the forecast. Second you invest according to your forecast. Third you tell your friends. Fourth you tell everyone. Fifth you sell your investments. Sixth, you repeat."

Now that is evil...

JL: No. It's banking. As Richard Nixon famously said: "If the President does it, it's legal."

Keep in mind that the value of economists' reports is not in simple predictions such as how much the CAD will be worth in USD by year end, since financial markets can yield such basic forecasts already, including such things as probability distributions and correlation structure (which can be backed out from derivative prices by using simple quantitative analysis). The true value of a detailed report is in explaining how that simple prediction may change depending on future changes in various factors, and what implications that prediction may have for other economic phenomena (such as development in the Canadian economy, business strategies and the like).

On a more complex level, economic analysis is also useful when it manages to back out a plausible "story" which validates predictions from multiple markets.

Alternatively, analysts may provide "contrarian" scenarios which are currently discounted by the markets as unlikely, but may need to be considered as a precaution against tail risk.

As it has been mentioned above, the primary role of economic research is to generate credibility for the bank so that it can attract trading flows. The bank then makes money from these flows. In addition, not all research is available to the public; some is only sent out to clients. But the point is that all these public forecasts have nothing to do with prop trading. It is about bringing in clients. In any event Dodd frank will significantly curtail prop trading for banks on anything that is done in the US so banks have to move away from that as a source of revenues.

If you are selling data your market is wall street, so you can publish the data for free and sell a subscription that allows you to access it a few days earlier. The free releases are marketing for the paid releases. But most of the time they are just marketing for something else -- e.g. other releases or services.

On second thoughts, I think the key question is: how accurate do you think your forecast is, vs how accurate everyone else thinks your forecast is. If everyone else thinks your forecast is as accurate as you think it is, you should buy, then release your forecast, then immediately sell, because there are no more profits to be made.

Correct. Hedge fund managers are always telling each other the "next big move"--after they've positioned themselves to profit. After you find the arbitrage opportunity you want to reveal your knowledge (but not your method) so that the market prices in your information. Then you can sell.

Time is money. You want your information priced in quickly so you can move your capital on to the next opportunity.

JL: We want prices to reflect information (on fundamentals). That will (usually) lead to people making better decisions. The quickest way to get prices to reflect information is to publish that information. And if we want people to have an incentive to collect information and publish it, we want them to profit from doing so, which is what happens when they trade on that information, and then publish it.

(There's possibly a separate question if that information is "insider" information, but that's not the case in Stephen's example, I think.)

An alternative hypothesis. There are only 6 - very very large - banks in Canada, that routinely and regularly attract the ire, anger and wrath of people who do not like banks or those that do not like large corporations. In short, the banks are a target, day in and day out. Thus, they have an image/reputation problem that they wish to address.

What can be done? Create an Economics Research Department and staff it with highly educated and respected economists to undertake credible, applied economics research (that is probably not being undertaken every day in university economics departments - but that too is a hypothesis).

Adopt a policy that the research be given away to the public for free.

Advise bank economists they are expected to speak to and meet with the media when called - which they do.
The media exposure on national TV news shows brings attention to their respective bank, to their research and allows the bank to present a favourable, credible image - which implicitly contradicts the criticism at the general reputational level - while simultaneously illuminating, informing and perhaps influencing public opinion on specific issues (and at the same time that the criticism that banks are "big and bad" is perhaps misleading).

This is vastly more valuable than having a seat at Finance's table - which they will have regardless - because of their size cf Charles Lindblom (Yale economist who was architect of Lyndon Johnson's Great Society), Politics and Markets: The privileged position of business.

Sounds like the 'earned media' hypothesis in the OP.

And I never can figure out how and why people use the adjective "respected" for private sector economists. How did they earn that respect?

It is a form of fallacy of affirming the consequent and a very, very common one. If business does it and pays for it, it must be worthwhile, valuable and therefore earned.

It is also a circular argument. It is extremely common among people of my parent's generation, baby boomers who got good jobs and never questioned their employer. Employers are good, provide pay and benefits as a sort of right in return for "good work". Similarly the work done is therefore worthwhile, valuable and unimpeachable. They never think that corporations can and will behave badly or do unwise things.

Witnessing two grown men, owners of the company I worked at have temper tantrums in the board room and other things rid me of the fallacy before I graduated high school.

No doubt there is a mix of activities between what Ian Lee describes and 'earned media'.

"How did they earn that respect"

The process seems to be:

1) Make a lucky guess.
2) Appear on CNBC twelves times a week.
3) Start consulting firm.

Even a stopped clock gives the right time twice a day.

Determinant: i was born at the peak of the boom. Believe me I never trusted my employers and was never disappointed. I tried to be loyal to my profession ,colleagues and students, most of whom returned the favor.

And yet if I had a dollar for every fifty-something who looks appalled when you tell them your employer doesn't provide you a DB pension or drug benefits.

Of course it isn't everybody but the type is common enough to form a distinct species. What the hell were they feeding these people in high school in the 1970's?

Maybe for a bank (particularly one in an oligopoly) the value of a stronger economy is greater than the value of a knowledge advantage.

While these responses invoking psychological generalizations concerning the minds of boomers and guessing consultants on the American network CNBC may obtain a decent grade in some schools, the responses did not address Stephen's very interesting research question: why do Canadian banks give away their research?

Some (many?) large banks and other financial institutions in the very crowded London market (frustratingly) lock their research behind a client subscription wall.

(Unfortunately, as Don Drummond noted in the festschrift to Ian Stewart, there is not a lot of public policy economics research being done in the academy. That is why I gravitate to bank economics research depts for instant micro analysis and to OECD for longitudinal comparative analysis such as their superb 2010 Tax Policy Reform Study).

By contrast, in Canada, there are only a few banks, each of which are very large, and each have invested significant resources in economics research. Yet, (thankfully) they make it free (best empirical analysis I read concerning Canada's homeowners at risk was by CIBC Deputy Economist Ben Tal segmenting Van and Toronto from the dataset and segmenting by percentage of equity).

Oblivious: I find your suggestion helpful. The amount invested in their economics departments probably does not measure a meaningful number as a percentage of total banks assets, while the banks have an overarching interest in the health of the economy.

Related question to supplement Stephen's question: why have the Canadian banks recently started to hire politicians or public servants e.g. Kevin Lynch, Jim Prentice, when they did not do this in the past?

Restated: the trend started with the smallest bank at the time (TD) when they hired Clark and then Don Drummond. Why the smallest and not the largest i.e. Royal, which presumably would be more vulnerable - due to size - to criticism?

I think that those who have responded along "earned media" lines are in the right of it, but it's worth expanding a bit on the point.

First, you should not think that a bank is a monolithic entity with a single interest; a large bank harbours many competing interests. Prop trading is not the major source of profit for most of the world's banks and in particular for Canadian banks. Furthermore, no way would a prop trader accept the proposition that some economist can make a better market forecast than he can. That would undermine his raison d'etre. A prop desk formulates it's opinions independently; not only independently of other businesses, but of other prop desks. It is entirely possible for two desks within a single bank to adopt contradictory views; in effect, trading against each other.

Second, those who are suggesting that Canadian banks are unusually active in publishing "free" research have the facts backwards. All of the large international investment banks publish extremely useful technical market papers; I regularly use excellent stuff freely published by JP Morgan, Morgan Stanley, Barclays, Lehman etc. Note that these are precisely the banks that do have large trading operations! (But all of the freely available papers have prominent disclaimers saying that the techniques described are not those used internally by the bank.) On the other hand, I have never seen a useful technical paper from a Canadian bank except under NDA.

The exception among large broker-dealers is Goldman Sachs; I can't recall ever seeing a useful technical paper from them. However, they publish free economic predictions all the time. In that respect, they are the most Canadian of all.

Finally, regarding backing out probability distributions from market prices: by definition, this is a useless exercise for investment purposes because such probabilities are risk-neutral (i.e. arbitrage-free.) You identify an investment opportunity when you think that the "real" probability differs sufficiently from the risk-neutral.

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