Nobody knows nothing
12.15.08
Everyday, my mailbox gets inundated with reports from strategists and economists. Two years ago, most were predicting a fairly rosy scenario for the global economy - and to be fair, so was I. Today, most are predicting a dire future of negative growth and economies mired in a deep and intractable recession. The predictions of the past were mostly wrong; there is little reason to believe that today’s forecasts will be much better.
Of course, there were those who were warning of problems, those Cassandras that went unheeded. But many of them warned of problems unrelated to the near-collapse of the global credit system, and the fact that their predictions that something would go wrong were right doesn’t actually make them prescient. It’s the old “even a broken clock is right twice a day” paradox. You can seem to be right, but it’s how you got there that matters. Many people correctly called a housing bubble, but almost no one identified derivatives and structured products as a pending issue that would unravel quite the way it has. The breakdown of the credit system, not the housing market, explains the particular pickle of the present.
When people look to the future, they tend to take the present and extrapolate. Industrial production is plummeting, so people forecast that it will be terrible in 2009. Unemployment is rising steeply and quickly, so predictions are that it will get much worse before it gets better. Past patterns are used as the basis of those predictions, but few question whether those patterns are indeed useful.
We should, because they aren’t. Nothing quite like the present crisis has happened before. There has never been a simultaneous, global halt of economic activity. Before the information technology revolution, there couldn’t have been. There weren’t global synchronized supply chains and credit systems and capital flows that could halt in sync. Now there are, hence the simultaneous, nearly instantaneous cessation of activity after the failure of Lehman Brothers in September.
This also means, however, that the engine could start again in unexpected ways with unanticipated speed. I’m not saying that it will, only that the possibility shouldn’t be as discounted as it currently is. Again, no one knows outcomes here, and past patterns are a misleading guide to the future. All that seems certain is that people rarely get future scenarios right, and there is no reason to believe that current projections of a dire future will be any more accurate than past projections of a rosy one.
Tags: credit crisis, Economy, predictions, recession
December 17th, 2008 at 5:46 pm
Caught your appearance on th Kudlow Clown Show tonight. (”Palm trees!!! Mustardseeds!!!”). I wish you had been able to finish your point about the possibility of a sudden re-start in demand. Could you elaborate?
December 21st, 2008 at 6:49 pm
Indeed….if nothing else, the future seems to be very hard to predict based on the experiences of the past. I’d be interested in understanding your view would be on what the “early indicators” of a recovery might be, and what segments might turn around first?
Enjoy your appearances on fast money…wish you (and the others) had more than 8 seconds to develop a thought.
Dave L
January 2nd, 2009 at 7:35 pm
I sorta doubt consumers will start borrowing and buying this January and the corporations will forecast this and hire all the people back they laid off before February arrives.
One thing that does seem fairly constant is that it takes time to turn the economy in a different direction.
Now it is slowing, the Fed is creating money, maybe in 6 months it will start the economy rising at a rapid rate.
Housing prices are still dropping, it seems they still much more than replacement costs.
We will see.
January 15th, 2009 at 9:50 pm
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January 17th, 2009 at 11:44 am
The economy will fire up one day and it may happen quickly. It could happen at the end of 2009 (idoubt it) or the beginning of 2011.
It seems the consequences for buying way early are devestating if the market gets sawed in half again. too early = wrong
January 29th, 2009 at 10:11 am
With all due respect, I’m not sure what this post is trying to say? Is your point that no one can ever really predict the future? If so, then why should we listen to ANY financial program that has guests talk about their predictions for the economy and market? If they are all so fallible, wouldn’t all this chatter be a waste of time? Are all these programs, including the ones you appear on, useless? Why then do we listen to ANY economist or market strategist if it’s all so pointlesss?
Or are you saying we should ignore most forecasts because they’re currently generally negative? Why weren’t you (and others) saying we should ignore forecasts during the boom years when the forecasts were generally positive? It’s funny how no one was criticizing the accuracy of forecasts when they were positive, but now, suddenly, we’re told to ignore such forecasts because they’re negative and hey, we’re probably all wrong anyway.