Predicting the Future (or Not)

Just last December, many people expected the world to end because the Mayan calendar's "long count" ended on December 21, 2012, and the inference was made that the Maya therefore did not see any time beyond that date. The further inference was made that that implied that the world would end on that date.

There have been many other predictions of the end of the world. There was one fairly recently that got a lot of publicity (I don't remember the name of the minister who made the prediction; forgive me for not taking the trouble to find it out but it's not that relevant here).

And predictions of the end of the world have been going on for a long time. The year 1000, the end of the "millennium," was expected by many to bring the Second Coming of Christ and thus the end of the world.

Needless to say, in spite of all these predictions of doom, we are all still here.

And there have continually been economic predictions of disaster: the bond market is going to crash, the stock market is going to crash. At one point, a couple years ago, I saw a very amusing sign in downtown Chicago: "Economists have successfully predicted 13 out of the last 7 recessions."

Only a very small percentage of these economic predictions or forecasts have turned out to be true. (As implied, there've been a few—very few—notable exceptions.)

Let’s look at scientific predictions. A lot of those have been colossally wrong. I saw an interesting list of those, once. The only one I remember: the great scientist Lord Kelvin predicted, "The atom will never be split."

Natural phenomena such as volcanic eruptions, earthquakes, and tornadoes can be predicted poorly, if at all. (I think the state of the science has advanced but only to the point that earthquakes, volcanic eruptions, and tornadoes can only be predicted once certain precursors have been observed. Unfortunately the current state of the art is that weather professionals can give no more than 20 minutes advance notice of a tornado.)

Let's look at weather prediction--usually called "forecasting." That definitely has improved a great deal but still has its limitations. You could say it depends on extrapolation, by which I mean, you see a storm and you just calculate where it would go if it continued on the same track. That's the method also used with hurricanes and there it's somewhat less of an accurate prediction because hurricanes can change their course.

So many predictions herald some sort of doom (getting back to end-of-the-world scenarios) and I find it amazing that so many people take them seriously. Which is not to say that some disaster could not occur that would bring very widespread devastation to Earth with loss of life. The meteor that recently struck Eastern Russia had not been foreseen and that fact is alarming. It could have been bigger than it was, it could have fallen more vertically, etc. Any one of these conditions could have resulted in more destruction and even great loss of life.

Many attempts to predict the future are fantasy, wishful thinking. Who has not dreamt of making a fortune by knowing what will happen with the stock market or knowing which horse is going to win the race against long odds?

So, aside from the limited predictions which science can offer us, there is no knowing the future. When it's election time, I pay no attention to any predictions: I tell myself that we will know in the event, and I can wait until then.

Update, August 14 2013
Here is an article on wrong predictions: http://www.mandatory.com/2013/08/05/10-of-the-worst-predictions-in-history/1


Copyright © 2013.

Is the Economic News Bad, and Is It Obama's Fault?

The following was written some six months ago by a large mutual-fund management company, T. Rowe Price:

For the better part of the past two years. equity [translation: stock] investors have tended to downplay good news—such as the impressive recovery in corporate earnings—and fret over bad news, such as Europe's debt crisis, stubbornly high U.S. employment, and a host of other perceived risks.

This was written specifically with reference to stock market and investment concerns; but it strikes me that it's not only investors who seem to focus on the negative, on the bad news (and not just financial/economic/investment news).

It's often been said that the media tend to showcase the bad news; to my mind that may or may not be true. But certainly politicians like to seize on the negative aspects of the current domestic financial and economic picture. After all, they want to unseat an incumbent president and to do so, they will do everything they can to argue that things are not good, that they have not been good for three years (never mind that some of the current problems could more accurately be said to have originated under the previous administration), and that Obama is to blame.

The Price article continues, "So far this year, good news appears to be winning." And then they quote stock market indexes, which are measures of aggregate stock-market prices. The article goes on,

The market rally has been powered by stronger monthly U.S. employment reports, better economic news from China, and the significant liquidity boost to European banks from the European Central Bank's refinancing operation.

Yet, even as economic risks appear to be receding. . . the outlook for corporate earnings' growth is becoming less favorable. . . .[G]lobal earnings growth should slow to a still healthy mid-single-digit growth rate this year. . . .[T]he earnings slowdown is a natural result of the economic cycle. . . .We've now reached the point of the cycle where you would expect to see slower earnings growth.

The slowdown has been exacerbated by several things which include "an economic soft patch in the U.S. tied to a fiscal stalemate in Washington. . . ." So the very politicians who are criticizing Obama and blaming him for economic bad news are themselves contributing to that which they're blaming Obama for. And--maybe most importantly--things are not as bad as some politicians would have us believe.

Copyright © 2012 by Richard Stein

Stein's Laws

At one point everybody seemed to be promulgating their "laws." We had Murphy's Law, Parkinson's Law, the Peter Principle.

Well, here are a few of my own "laws."

1. You usually get an itch when can't scratch it because you've got both hands full.
2. The quality of the food at a restaurant is inversely proportional to the amount of hype from the management. In other words, the more a restaurant hypes its food (e.g., "the best . . . in the world") the worse it actually is. Good food will speak for itself.
3. Within 10 minutes after buying gas, you see it cheaper.
4. That stock you thought about buying—but didn't—will triple or quadruple.
5. As soon as you switch off the vacuum, you notice at least two visible bits of dirt on the floor.
6. Gas station employees should not be asked directions because they don't know the area beyond half a mile from where they are standing.
7. When a new building has been built, you can't remember what used to stand there.
8. Law (or advice) for Asian business people (e.g., people who run Chinese restaurants, stores, etc.): If you need to give an explanation to an Occidental customer, you can give her any BS, because (1) you're smarter than they are, and (2) they won't understand you anyway.
9. Two men who have similar patterns of facial hair are going to be perceived as "looking alike."
10. Sometimes life will give you a second chance. But don't ever, ever expect that you'll get a third chance.
11. Elvis is dead but Picasso lives.

Copyright © 2012 by Richard Stein

Is the Stock Market Stacked Against the Small Investor?

It's often said that only big investors can make money in the stock market, and that things are stacked against the little guy, the small investor.

While I don't think the first part of that is true, the second part is. More is possible for you if you are a big investor. Hedge funds and some mutual funds are only open to people who have a large sum to invest, such as a million dollars.

A stark example, which has stuck in my mind for many years: When Apple Computer was first going public--having its IPO (initial public offering of stock), in the jargon—I called my stockbroker and said I wanted to invest in it. He explained to me that he was allotted only a certain amount of stock that he could sell, and, he said, "It's going to my big customers—and I mean big, million-dollar accounts." The example really needs no comment.

Many fees, such as brokerage fees or account maintenance fees, are flat fees so that they are proportionately less (per share, for example, in the case of brokerage fees) for larger transactions or larger accounts.

Not to mention that, once you get into the really, really big money, really big investors can own a large enough proportion of a company's stock that they can influence the running of the company by getting themselves or their own candidates on the board of directors. Then, presumably, they look after their own interests, whatever they may perceive those interests to be.

And when it comes to taxes on their income, again the wealthy have an advantage. A lot of tax-advantaged investments, such as municipal bonds, are most beneficial for wealthy investors. And the very wealthy can get better tax advice and guidance by hiring very savvy tax attorneys, and thus they can largely or entirely avoid paying income tax.

Someone once said that it's easy to make a lot of money and hard to make a little money. I heard that a long time ago and I keep realizing, more and more, how true that is. But usually you need money to make money.

Copyright © 2011 by Richard Stein