Be wary about forecasts

Expectations for 2011 seem to be getting better all the time, but Fortune's Shawn Tully says that the predictions will turn out to be wrong.

The problem with these predictions isn't that they rely on complex economic assumptions. It's just the opposite--they're really not forecasts at all, but extrapolations. The pundits are telling us that recent trends will simply keep rolling. They could be correct, but only for a while. In the longer term, these forecasts will prove wrong, for a simple reason. Most assets are already selling at prices far above their historic averages. As economic gravity takes over, they'll inevitably return to those benchmarks -- meaning stocks, bonds and commodities have a long way to fall.

He also has some sobering advice about equities.

The best measure of the whether stocks are cheap or expensive is the price earnings formula devised by Yale economist Robert Shiller, which divides the current S&P price by a ten-year average of inflation-adjusted earnings. By smoothing earnings, Shiller avoids the error of judging that equities are cheap when profits are unusually high, as they are today. Today, the Shiller PE is a lofty 22.7 -- that's more than 40% higher than its long-term average of 16. Indeed, stocks could keep rising for months or even longer. But that would make them simply more overvalued than they are today.