Big-picture Forecasts Are Usually Nonsense!
Big picture analysis, and the predictions of calamities that are sure to hit down the road, are fun to read. But such long-term forecasting is almost always based on the favorite forecasting tool of scientists and economists – extending current trends in a straight line into the future, without considering that trends only continue until conditions change. So, as convincing as they seem at the time, big-picture predictions rarely work out as expected.
That is illustrated by the fact that the world hardly ever comes to an end. Yet for centuries ‘trend-extending’ has regularly predicted just such a result – based on everything from holy wars, black plague, and rising ocean levels in previous eras, to nuclear weapons proliferation, depletion of the ozone layer, and the AIDS epidemic, of more recent times.
The fault in such thinking is not only that trends continue only until conditions change, but that when trends are troubling, people and forces respond to bring about those changes.
Vaccines are developed for polio, TB, AIDS, bird-flu and mad-cow type epidemics and pandemics that periodically threaten to envelop the world, with the feared trends actually resulting not in annihilation of the human species, but in an improvement in life expectancies.
In the 1940s and 1950s, by extending the trends of population growth and food production, it was scientific fact that the world was on a collision course with massive starvation. Best-selling books like ‘The Population Bomb’, ‘Famine 1975’, and ‘Our Plundered Planet’ predicted world-wide famine by the 1970s in which hundreds of millions of people would die, with a “substantial increase in the world death rate.”
Other studies showed that even in the U.S. there would not be enough land to feed the growing U.S. population by the year 2000.
But farmers worldwide learned new soil management, new cattle feeding and breeding techniques. Science developed healthier seeds and feeds. Farm machinery manufacturers provided more efficient equipment.
And rather than the ‘big picture’ prediction of a worldwide starvation catastrophe and substantial increase in the world death rate, in reality the global death rate declined substantially, and average calories consumed per person increased by 24%, even though the population of the world doubled.
In the U.S. widespread starvation was not only avoided, but the trend reversed to the opposite extreme; of food surpluses, overflowing government food warehouses, gifts of surplus grains to foreign countries, and even subsidies to farmers to leave fields unplanted.
Governments are certainly not immune to the fallacy of extending current trends as a means of forecasting the future, while ignoring the history.
In the 1980’s, U.S. government budget deficits surged to new record highs as the Reagan Administration dramatically hiked government spending in efforts to pull the economy out of the stagflation malaise of the 1970’s.
Economists, extending that trend in a straight line into the future, competed with each other with dire forecasts of how soon the country would be bankrupt.
However, in the 1990s, the return of a booming economy allowed government spending cut-backs without harming the economy, which combined with a big surge in tax revenues from rising corporate profits, and capital gains taxes created by the explosive stock market of the 1990s, not only produced a balanced budget, but several years of large budget surpluses.
Not surprisingly, by 2000 the previous negative trend was forgotten and the new positive trend was being extended in a straight line into the future. Congress began making plans to spend the budget surpluses that economists were now projecting would continue for several decades. It was being projected that within ten years the entire U.S. national debt would be paid off; social security would be completely funded; and the population could be provided with full healthcare. There would even be plenty left over for tax cuts, and increased spending for defense and education.
Once again that trend only lasted until conditions changed.
The stock market plunged into the severe 2000-2002 bear market, depriving the government of the healthy capital gains taxes it had been receiving. The economy plunged into the 2001 recession. Workers lost their jobs, causing the government’s take from income taxes to also nose-dive. The 911 terrorist attacks took place, resulting in large increases in government spending for homeland security. The invasions of Iraq and Afghanistan followed, with their escalating costs. The picture reversed again. Budget surpluses became large budget deficits.
The 2008 financial meltdown and ‘Great Recession’ then hit, and the budget deficits grew even larger, reaching new records as massive and costly stimulus efforts were undertaken to prevent the recession from becoming a full-blown Depression.
Not surprisingly, as the budget deficits have reached record levels, economists are now extending that trend in a straight line into the future, returning to predictions that the Social Security system will soon be bankrupt, the country will face dire healthcare shortfalls for decades, providing school and other public project funding will be an insurmountable problem, and it will be near impossible for government budget deficits and debt to ever return to normal and manageable levels.
And so it goes, cycle after cycle, as conditions swing back and forth from one extreme to the other. Sometimes the pendulum catches a tailwind, and a trend lasts longer than usual. But at some point, the pendulum reaches an extreme and begins to swing in the opposite direction.
I was reminded of that in recent days, on reading of yet another dire big-picture prediction that has taken an unexpected turn.
It was not many years ago that it was predicted that at the rate the U.S. was consuming oil, its domestic sources of oil were being depleted, and its imports of foreign oil were soaring, the U.S. economy would soon be at the mercy of OPEC and foreign oil producers.
But trends only continue until conditions change.
Now it’s being projected that the U.S. will surpass Saudi Arabia as the world’s biggest oil producer by the year 2017, and will eventually become totally energy independent.
However, nowhere is the tendency to extend trends in a straight line into the future without expectations of reversals more prevalent than in the world of investing.
Infamous historical events like the ‘Tulip Bulb Mania’, ‘South Seas Bubble’, the ‘Florida Land Bubble and Crash’ in the 1920’s, (and more recently the real estate bubble in 2006), the stock market bubbles in 1929, and 1999, are extreme examples of the ‘this time is different – extend the trend endlessly into the future’ events that turned around to bite investors savagely.
But on a smaller scale, extending current trends into the future is also what entices investors to buy more enthusiastically after rallies and bull markets have already made big gains, often even as so-called ‘smart money’ institutional investors and other professionals have begun selling into that final strength.
In the other direction, investors tend to finally sell in disgust, and lose all interest in the market after a significant correction, and more so after a bear market, then extending the negative trend in a continuous line into the future, often even as so-called ‘smart money’ institutional investors and professionals have begun buying again at the bargain prices.
The obvious lesson from the economy and markets is to think cycles, not endless trends; to downplay, if not totally ignore, the predictions from big-picture analysis that are based on extending whatever are the current conditions, and whatever is the current trend, in a straight line into the future; to keep in mind that there are always forces coming into the picture, not always discernible at the time, that are intent on changing the conditions and therefore the trend.
Just a few thoughts to ponder as the stock market tumbles, and big-picture analysis extends the trend of the last couple of years of dysfunctional politics in Washington, predicting dire long-term consequences, even as there is increasing evidence of work being done to reach a compromise and end the dysfunction.