When the crystal-ball gazers learned to eat ground glass
'THERE'S SOMETHING about a new year that brings out the prognosticator in people. The question is, who do you believe? The media pundit? The analyst? The newsletter writer? Answer: none of them."
The above lines were penned by this writer a year ago, the conclusion being derived from detailed academic research that showed the experts are, well, pretty hopeless when it comes to forecasting. 2008 confirmed that thesis, the year being a disaster for crystal-ball gazers.
Irish Life Investment Managers envisaged global equity returns of 12 per cent, arguing that the market sell-off was "overdone". Investors disagreed and global markets had halved by November.
Davy Stockbrokers said Dublin stocks could rise by about 20 per cent as the market looked forward to economic recovery in 2009. Ironically, Davy's prediction that economic growth would slow to 2.1 per cent this year was the most bearish of the Irish analysts. NCB, for example, foresaw growth of 4 per cent with "continued immigration" helping to "firm up the housing market".
American forecasters were just as positive, proving the old Wall Street adage that you don't need analysts in a bull market and you don't want them in a bear market. "The last time an opportunity of this nature existed to buy bank stocks this cheap was in 1990," said veteran analyst Dick Bove last March. "The next time will be in 20 years. This is a once in a generation opportunity."
Bearish strategist Barry Ritholtz agreed that financials were generational buys. "You won't get back to break-even unless you hold onto them for at least another generation," Ritholtz quipped.
Analysts expected an average 11 per cent advance in the SP 500 in 2008. They remained bullish even as the deepening financial crisis played out. By July, America was in the midst of its worst housing slump since the Great Depression and markets were 14 per cent lower. No matter, said David Bianco of UBS. The second half of the year would produce a 25 per cent rebound, "one of the greatest roars we've seen".
Bianco was no lone bull - the consensus projection of 10 strategists surveyed by Bloomberg was that the SP was about to enjoy its best second-half performance in 26 years. Unfortunately, the only thing that roared was the bear and the selling soon hit levels last seen in the 1930s.
Politicians, regulators and chief executives all cocked up in their assessments. In Ireland, Central Bank governor John Hurley and Financial Regulator Patrick Neary insisted that Irish banks were "well-capitalised", even as institutional investors ran for the hills. In the US, Federal Reserve chairman Ben Bernanke said the subprime fallout would be "contained", while US treasury secretary Hank Paulson was cheering "the strongest global economy I've seen in my business lifetime" just 18 months ago.
"The worst is behind us", or words to that effect, were uttered by chief executives at Lehman Brothers, Goldman Sachs, Morgan Stanley, JP Morgan, Deutsche Bank and Citigroup between April and May.
Media gurus? Even worse. "Stop envying Goldman Sachs' Lloyd Blankfein," said CNBC's Jim Cramer in 2007. "Don't begrudge Bear Stearns' Jimmy Cayne and Lehman's Dick Fuld their millions. Let Merrill's Stan O'Neal and Morgan Stanley's John Mack get paid more than Croesus. You heard it here first: they deserve it. In fact, they deserve more than they earn now. Those five men are underpaid because they are about to make you very rich if you buy their stocks."
2008 saw Cramer spout similar guff. "Bear Stearns is not in trouble", he said on March 11th, just days before the bank collapsed. "That was the bottom," he said in July. "Fundamentals have changed and we are not going back down to where we were." By September, he said that oil falling below $100 would instigate a "wave of buying".
Cramers CNBC colleagues mirrored this cheerleader stance. A year ago, fellow presenter Larry Kudlow said that "the recession debate is over. It's not gonna happen. Time to move on."
It later emerged that the US economy had gone into recession the very month that Kudlow pronounced the "Bush boom" to be "alive and well".
Another CNBC regular, strategist Don Luskin, spent all of 2008 bottom-fishing. "Oh my God, you've got to be buying stocks here," he said in January.
By March, there was "no question" that stocks had bottomed. "It's time to go in and buy junk bonds, it's time to go in and buy leveraged loans, it's time to go in and buy mortgage backed securities, it's time to buy financials."
Luskin maintained this train of thought throughout the year, scoffing at those who questioned his bullish vision.
Fortune magazine also liked financials last year. "What do you call it when an $8 billion asset write-down translates into a $30 billion loss in market cap?" asked one commentator 12 months ago. "An overreaction."
The stock in question, Merrill Lynch, was "trading at a mere eight times 2008 earnings" and would soon "post sizable gains as it writes up the same assets it was forced to write down". After all, "financial panics are almost always overblown".
Merrill was one of Fortunes "best stocks for 2008", just as AIG was picked for 2007. Forbes agreed, saying in April that Merrill was "in damn good shape". No, it wasn't. At its November nadir, Merrill was down by over 85 per cent for the year.
BusinessWeek maintained its age-old reputation for dud picks, recommending Lehman in April.
Oil, too, confounded the prognosticators. Goldman Sachs, which predicted $200 oil earlier this year, were still targeting $149 oil just last September. Credit Suisse agreed that "the bulk of the correction is behind us" and oil "should not remain below $100 on a sustained basis". Goldman reduced its target price to $30 this month.
Some people were spot on, of course. Nouriel Roubini's dire predictions were uncannily accurate. George Soros has been warning for the last 18 months that the world was facing its worst financial crisis in generations, as has his one-time trading partner Jim Rogers. Fund manager Jeremy Grantham warned in 2007 that the "overstretched, overleveraged financial system" resembled a "slow-motion train wreck" and "at least one major bank" was likely to fail.
Analysts like Oppenheimers Meredith Whitney and Société Générale duo James Montier and Albert Edwards distinguished their profession with incisive analysis throughout 2008.
Short-sellers like David Einhorn, Jim Chanos and John Paulson were all warning of danger ahead while a complacent establishment was telling the plebs that all was fine and dandy. Michael Panzer, author of 2007 book Financial Armageddon, has been incredibly accurate in his prognostications.
For the most part though, the supposed seers were embarrassingly wrong in 2008. To see just how wrong, Google "Peter Schiff was right, YouTube". TV clips show money manager Schiffs warnings of financial upheaval being laughed at by fellow panellists. It makes for hilarious if cringe-worthy viewing.
Today's "experts" are no worse than yesteryear's. A recent study of economists' predictions found that of 60 different economic contractions in the 1990s, 97 per cent of the forecasts failed to indicate a recession a year in advance. Those that did significantly underestimated the severity of the slowdown.
As former US defence secretary Donald Rumsfeld said: "There are known knowns; there are things we know we know.
"We also know there are known unknowns; that is to say we know there are some things we do not know.
"But there are also unknown unknowns - the ones we don't know we don't know."
Or, to quote economist Edgar Fiedler: "He who lives by the crystal ball soon learns to eat ground glass."