There’s been a big brouhaha in recent weeks over who actually predicted the financial crisis and whether it matters. I think maybe we’re asking the wrong question though. The reason is simple – we’re being biased towards one narrow part of the business cycle.
One thing you’ll find among those who claim to have predicted the crisis is that a lot of them are perennial bears. I often cite Wynne Godley for predicting the financial crisis in the USA and the Euro crisis, but Godley was famously bearish throughout his life. And that tends to be the case with many of the economists who “predicted” the crisis. You find that many of them were bearish for years or even decades before the crisis and then when the storm hit they were lauded for their forecasting capabilities. A classic case is someone like Peter Schiff who seems to always be negative about something in the USA so when something finally goes wrong he tends to have his hands in some part of the “forecasted” disaster. It’s the old “stopped clock” thing…
Now, I should add that the main reason I love Godley’s predictions is because he clearly explained WHY the crisis would occur. That is, he understood, at an operational level, why something was wrong with the US economy and the Euro system. He wasn’t just screaming fire in a crowded theater for 20 years straight. He was explaining precisely why there was a high risk of fire in the first place and showing us precisely why the theater was so dangerous. Most of the predictors of the crisis were just towing the party line or saying the same thing they’d been saying for a long time (like, debt is unstable, government is bad, the Fed is a ponzi scheme, etc). But maybe we focus on one part of the business cycle too much. After all, a great trader doesn’t make money just because he makes a great prediction in one direction. He must also be smart enough to know when the odds have changed and now favor cashing out. So maybe the better question is, who predicted the crisis AND the ensuing recovery? In other words, who predicted the entire cycle instead of just the part that gets all the media attention? Isn’t that a better display of real skill in forecasting?
So the more important question here might not be who predicted the bust, but who ALSO predicted the boom afterwards? Okay, “boom” might be a bit of an overstatement, but there’s certainly been at least some recovery. There’s definitely been a huge recovery in most assets, but I know we can debate the strength of the recovery. Anyhow, is there anyone who was extremely bearish heading into the downturn who was also prescient enough to predict that the world wasn’t ending and that we might actually be on the verge of a big turnaround when things looked so terrible in 2009/10?
Honestly, I can’t think of anyone off the top of my head who did this so I wanted to throw it out there to you guys. Did anyone predict the bust AND the boom?
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.