CRYSTAL BALLING
I am privileged to have a correspondent who likes to write articles claiming to predict the political future in a scholarly sort of way, i.e. that if Congress passes some new law here's what will happen next. He had expressed just a bit too much confidence in his ability to foretell the future for my taste.
My attitude is that I wish I was as sure of anything as true believers are true of everything.
Then I came across an observation from Niall Ferguson which appears in the following email to my friend:
I thought of you and a recent discussion in which you professed a certain degree of confidence in your ability to read the tea leaves when other (perhaps wiser?) folks fear to tread, when I came upon this, from Nigel Ferguson's new volume, "The Ascent of Money," (Penguin, 2008):
"Finally I have come to understand that few things are harder to predict accurately than the timing and magnitude of financial crises, because the financial system is so genuinely complex and so many of the relationships within it are non-linear, even chaotic." P. 14.
Same could be said for a lot of things.
Wisdom, in my view, is knowing what not to believe, not to mention whom.
The Ferguson book, newly published, is an interesting history not only of the use of money, going from clay tablets to precious metal coins to bank notes to bank electronic entries, but also of bonds, stocks, insurance and hedge funds. It clarifies everything and leaves you as hopelessly confused as you were before, only at a higher level.
The difficulty with economic forecasting, as I'm beginning to realize, is that it is less certain than horse-race win, place & show predicting using the racing form. In both all you have to go on is the track record of the horse, but the horse who won last week may be off his feed this week or may have taken a dislike to his jockey, not to mention the odds.
Bonds and stocks are supposed to be on contrary paths, when one goes down the other is supposed to go up, but they don't always. Just like gold, when the stocks fall, gold rises, except when it doesn't, such as recently. The old verities can lead you into the land of economic quicksand where government will need to bail you out, such as with Citibank as we speak, the largest bank in the world, baying like a speared mastodon.
Suppose you tried to model the economy on a computer in a way that took account of the expected behavior of the major players and you began keeping a list of who these were, such as this for example:
The harvest of wheat is poor in Argentina. What does this mean? Let's say that the value of wheat then shoots up in the U.S., which exports, say, to Russia. Or the price of oil on the world market per barrel rises (or falls) significantly, as has happened recently, going from $50 to over a hundred and back in a few months. This has what effect?
Effect on whom?
Oil companies such as Chevron? Nations such as Saudi and Venezuela? Consumers at the pump?
Investors in company shares? Bonds? The value of the dollar?
The list is endless and the commentators and analysts you hear and read all have their favorite groups whose reactions they pretend to forecast based on last week's horse race. I marvel at their supposed ability to say how I'm going to react, much less everyone else.
Your computer model would have hundreds of economically interested players going from the big boys down to the person who cashes his paycheck at a costly discount from a check-cashing store in a poor neighborhood where the people don't trust banks, and rightfully so, what with their hidden fees for overdrafts and failing to keep a minimum balance and to write a check.
And then, according to chaos theory, we have the butterfly effect, where it is said that a butterfly flapping it's wings in China can cause a hurricane to occur here. Some butterfly.
Which was the butterfly that caused the Dow to melt 50% since January?
Some butterfly.
This article was very interesting and helpful. There are a lot of good points and excellent suggestions.
Posted by: Check Cashing Store | November 25, 2008 at 08:18 AM