Ask Archer: Why do we bother to predict anything?
A reader asks: why do we bother to predict anything?
Archer replies: I have often been haunted by this question: are those who forecast the end of the world disappointed when it persists? Do they feel that they have somehow failed? Or do they just push the date out a little?
Here’s a recent Bloomberg headline: “Wall Street Humbled as Fast-Reversing Markets Confound the Pros.” Confounded? Yes. Humbled? Unlikely.
From the French astrologer and apothecary, Nostradamus, to the American psychic Edgar Cayce, someone is forever forecasting disaster. These prognosticators even have their own Wikipedia page. On Wall Street forecasts are malleable, subject to countless revisions. But the end of the world is a little different. It generally seems to require a sell-by date. High risk. High reward. But do you really want to be right?
There is always a persuasive argument to be made for disaster. One currently making the rounds: far from being salubrious for the markets, the next round of Fed rate cuts will precipitate a crash. The author of this counter-trend theory is money manager Mark Spitznagel, whose $16 billion hedge fund specializes in “risk mitigation against ‘Black Swan’ events,” according to an April Reuters story.
"People think it's a good thing the Federal Reserve is dovish, and they're going to cut interest rates ... but they're going to cut interest rates when it's clear the economy is turning into a recession, and they will be cutting interest rates in a panicked fashion when this market is crashing,” Spitznagel told the news service.
“We are living through the “greatest credit bubble in human history,” he adds, and the current interest rate regime will bring it all crashing down. “It’s not different this time.”
Hard to know (not investment advice.) Certainly there is a lot of debt floating around. In particular, the federal budget deficit – for decades shrugged off as irrelevant – appears to matter again. And it’s true that the look is not great. At $870 billion, interest payments on the debt are expected to be the second-largest budget item in 2024, ahead of defense and trailing only entitlements. Last year, interest amounted to about 2.4% of GDP.
On the obverse side, someone is on the receiving end of this. “Last year, investors pocketed nearly $900 billion in annual interest from US government debt, double the average over the previous decade,” wrote Bloomberg reporters Michael MacKenzie and Liz Capo McCormick. “That’s set to rise as over 90% of Treasuries carry coupons of 4% or more.” That equates to about 3.0% of 2023 US GDP, and it’s way better than the near zero treasuries were paying a few years ago.
Still, borrowing to pay interest to yourself is not quite the wealth creating equivalent of a perpetual motion machine. It’s more like the siren song of “double up to catch up” that has lured so many gamblers to a rocky end.
There is greater cheer (if not necessarily greater accuracy) to be found in shorter-term predictions. Barron’s “Big Money” poll, for example, reports that money managers are generally optimistic. “Fifty-two percent of poll respondents said they were bullish about the outlook for stocks over the next 12 months, up from 38% last fall, with another 33% describing themselves as neutral. About 15% said they were bearish, down from 24% last fall,” it says.
As we have noted before, the best forecasts are generally not forecasts at all; they are extrapolations. All else is vanity and vexation, to quote another prophet. As of March, the Federal Reserve was still anticipating three rate cuts in 2024. More recently, that number has fallen to one, or maybe none. Definitely vexatious.
In its January outlook, Morningstar wrote that the Fed would be cutting “aggressively” this year and next, forecasting a longer-term decline in the yield of the 10-year treasury to 2.75%, from the “current (January) levels of 4.0%.” No dice. As of this writing, the ten year was sporting a yield of 4.5% and inflation, which Morningstar projected would decline, has stubbornly refused to go away.
This is not to pick on Morningstar, or the Fed; there are plenty of examples of errant predictions. As always, a few forecasters have, or will, get it right; many others will get it wrong. The pattern will appear, and likely will be, mostly random. (Again, not investment advice.)
So what can we predict? A straight line interpolating the current growth in interest payments on the federal debt would have it quickly consuming the entire federal budget. That seems unlikely. But is there a tipping point short of that? No one knows.
Forecasting seems to be a human imperative, an article of self-deception dating back to somewhere around forever. If we tell stories in order to live as Joan Didion said, then we make predictions as a way to try and assert control over how those future stories unfold. They suggest that tomorrow is knowable, even though we understand it is not. And they serve another purpose: keeping all those PhD economists safely off the streets.
Woof.
(NOTE TO READERS: My book, Radical Problems, Simple Solutions: How Markets can Help Fix the Retirement Crisis and Solve Wealth Inequality is out. To purchase a copy and support your local independent bookstore, go to Flyleaf Books.)