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History is an Outline, not a Blueprint of the Future

One of the most important points I stress in my book is the importance of thinking about market environments as their own unique set of circumstances. In the world of finance and economics it’s always convenient to look at the past and draw conclusions about the future. We’re seeing this quite a bit in the current environment where Russia appears to be undergoing a currency crisis and many people are drawing their conclusions based on the 1998 experience. And while there are many similarities (falling oil prices, collapsing exchange rate, etc) there are also many differences (floating exchange rates, significant foreign reserve positions, etc).

The important point is that this cycle is not like the 1998 cycle. It’s different and it has its own unique causes and effects. Yet we see this sort of historical backtesting in all corners of the finance and econ world. It’s so convenient to extrapolate the past into the future in your portfolio construction or your economic forecasting because that makes us feel confident about our projections. But the reality is that no one really knows precisely how the future will play out and the future is certain to be different than the past to some degree. The best we can do is study the history, view it as an outline, understand the current environment and monetary system for what it is and put together the best blueprint of the future that we can.

So yes, it’s important to arm yourself for the future by studying the past, but we must also understand that our necessary forecasting of the future relies on more than understanding market history.