False Prophets

Every morning, I start my day by reading my newspapers over a mug of hot tea. (Yes, I still get my newspapers delivered!) Sometimes I just have to shake my head at the absurdity of it all. I don’t get mad or annoyed — I just laugh.

One day, the President wants to reduce the deficit he created by hiking taxes — especially on “the rich.” The next day, the G-20 wants to “save the euro” by funneling taxpayer dollars from around the world into the deadbeat countries of Europe — famous for not paying taxes!

Both schemes flow from the same flawed ideology: The key to prosperity is redistribution of wealth! Of course! It’s worked so well in other eras…

Then there is the bumbling of the Federal Reserve. I laughed out loud when I read in The Wall Street Journal about Charles Evans, a member of the Federal Reserve Board, who laid out his beliefs. He wants the Fed to maintain zero short-term interest rates “until the unemployment rate moves below 7.5% and as long as inflation doesn’t top 3%.”

Oh, my! Where to start? A line from Shakespeare often repeated by my late grandfather comes to mind — “What fools these mortals be!” Evans presupposes three things, all ridiculous. First, that we can accurately measure the unemployment rate to the decimal point. Second, that we can accurately measure the inflation rate in the same manner. And third, the mere mortals at the Federal Reserve can navigate the economy between these two imaginary posts.

If you believe Evans’ trifecta, then you are halfway to Alice’s practice of believing six impossible things before breakfast. The fact is such statistics come with huge error rates and there is much debate about how to properly calculate them. No joke, two earnest and well-intentioned economists can reasonably come up with vastly different numbers for unemployment and inflation. And if the Federal Reserve were as powerful as its hubris-filled bankers believe, events like 2008 should’ve been impossible.

Finally, let’s turn to the stock market. There are funny things about the stock market tucked in the paper every day. Whole columns full of words that mean absolutely nothing yet are treated with the utmost seriousness. I read in The Wall Street Journal that “In some ways, predicting the direction of the stock market many months in advance is more art than science…” Then the writer goes on to cite Wall Street strategists and their targets and methods.

Let me tell you this: Predicting the stock market many months in advance is in no way a science. And it is an art only if one takes a very low view of art as being utterly useless. I am amused that Wall Street firms pay these strategists good money for their opinions. We may laugh at our ancestors who consulted their own oracles that cast bones or read tea leaves or whatever. But modern society has equally absurd oracles, merely in different guises.

I keep a “You Can’t Make This Up” file, which I usually unleash on the Vancouver attendees every summer. It holds stuff I find in real news outlets that makes you think you are reading The Onion (the great satirical news site of our age that has been poking fun at human vanities since 1988).

Today, I have a new entry for the file, courtesy of The Financial Times:

“News Analysis: Experts are finding it difficult to make accurate forecasts at present.”

I read that to my wife and she laughed out loud. The headline seems so obviously absurd — as if predicting the future is ever easy. It’s always uncertain, and experts routinely get it wrong. But we like to pretend, somehow, that now is more uncertain than usual.

But that uncertainty is not a bad thing. It’s what creates opportunities in the market.

No one knows where the stock market will go. Some may make a right call now and then, but it is a hard road to follow. History is littered with busted oracles and their broke followers. Still, it is fun to guess, and there is nothing wrong with having a hunch and engaging in foolishness from time to time. Opinions are the stuff of life, as Nassim Taleb says.

Taleb wrote The Black Swan, which includes good advice on forecasters and how to deal with them. “Avoid the big subjects that may hurt your future,” he writes, “be fooled in small matters, not in the large.” You can indulge your passion for guessing and predicting, just don’t bet money on that. When it comes to committing real dollars, make sure you have something sturdier than mere guesswork and prediction. And don’t argue with a forecaster, either. As Taleb advises, “Just ignore him, or try to put a rat down his shirt.”


Chris Mayer,
for The Daily Reckoning