Talking Heads, Prediction, and The Future

“Most of what passes for ‘investment advice’ is nothing more than speculation about an unknowable future.” – Joe Calhoun III, Alhambra Investments.

“Economics is an entire scientific discipline of not knowing what you’re talking about.” – P. J. O’Rourke.

“What passes as sensible economic commentary by politicians, pundits, and preachers is but a torrent of extraordinarily simplistic myths.” – Professor Donald J. Boudreaux, George Mason University.

“Common sense is the collection of prejudices acquired by age 18.” – Albert Einstein

“For every complex problem there is an answer that is clear, simple, and wrong” – H. L. Mencken.

“Some of the biggest cases of mistaken identity are among intellectuals who have trouble remembering that they are not God.” – Thomas Sowell, prolific economist at Hoover Institute.

“Actually, one reason to read history is to know how little has generally been known about what was coming next.” George Will, from The Conservative Sensibility.

“No one knows anything…” William Goldman, writer commenting on Hollywood, but applicable to prognosticators. 

There is a lot of talk these days about things like artificial intelligence (AI) – good/bad? Or what President Trump will do next (Iran, nuclear weapons, gas prices, inflation, trade, economy). Or billionaire wealth. Or the stock market. Or who’s to blame for whatever negative meme is floating around. Worry is rampant.

This article is not about what the future will be, but rather why the future is unknowable and why commentators are usually wrong and if they are right, it’s mostly luck. 

There are those who were right about the future when everybody else was wrong. They get temporary fame as being wise people who are smarter than the rest of us and we believe that we should pay attention to whatever they say. Well, getting it right once is mostly luck, especially for those world-changing black swan events.

Take the financial world for example, a place where investors put their money where their mouth is. The financial meltdown of the Great Recession (2008) is a great example of a moment when just about everyone got it wrong. The big boys didn’t see it coming. Lehman Brothers, Bear Stearns, Goldman Sachs, Morgan Stanley, Citigroup, Merrill Lynch, Washington Mutual, Wachovia, BofA, AIG either collapsed, were forced into takeovers, or received government bailouts. An estimated 1,500 hedge funds folded their tents. They bet wrong on the future.

A good example of luck and wrong bets was London based hedge fund, Peloton Partners. In 2007 at the peak of the market they shorted subprime securities and when that market collapsed, they hauled in a spectacular 87% return. They were lauded for their success as fund of the year. In 2008, trading on their previous success, they bet long on now discounted subprime securities thinking they had hit bottom. The subprime market continued to collapse and by March 2008 Peloton Partners closed its doors. This is a classic tale of confusing luck with brilliance.

Today, we have seen major financiers like Jamie Dimon, Ray Dalio, David Rosenberg, Stanley Druckenmiller, and Mark Spitznagel who have been issuing dire predictions about the economy since 2022. These gentlemen are all people I respect. But they didn’t see AI coming. If you had bailed out in 2022 you would have missed the AI-tech revolution: the S&P 500 has gone up about 55% since 2022. I’m not suggesting we should ignore warning signs in the economy, there always are such warnings.  Rather, I’m suggesting that predicting the future is impossible. 

The current hot topic is AI. Will it lead to a brighter future for mankind, or will it disrupt the economy and society in ways that will lead to mankind’s doom?

My opinion (i.e., guess) is that it will benefit mankind. Much of the hysteria about it is based on fear and ignorance. I read a lot about AI, and I listen to podcasts featuring leaders of technology and finance. I’m aware of the arguments: power requirements will crowd out our needs, massive capital overinvestment, hollowing out jobs for the masses, dangerous actors using it to threaten our privacy and safety, robot rebellions when they achieve artificial general intelligence (AGI). Did I leave something out? I agree there are issues that concern reasonable people, but I don’t think they are
unsolvable. Many of these fears either ignore the laws of economics or they are already being addressed by AI companies. But what do I know?

If the geniuses can’t get it right, what should we do? 

Accept the fact that the future is uncertain and unknowable. It’s always been this way, yet for the past million years or so our species has made it through whatever massive changes the unknown future has thrown at us. 

Whatever you do, don’t panic. Ignore the talking heads. We’ll get through it.