Prediction in an Age of Uncertainty

Amazingly enough, the predictions keep coming. Of course it's that time of the year when, because of the empty symbolism of the calendar, pundits everywhere feel compelled to offer prognostications for the new year.

You would think this year, of all years, there would be some modesty to the forecasts. After all, not only did most of the commentariat fail to predict the onset of the crisis (that includes Ben Bernanke and, well, me), but then the crowd anticipating the various apocalypses after the fall of Lehman Brothers Holdings Inc. didn't exactly win the trophy for accuracy either. Recall all those forecasts of "W" and "L" recoveries last year. At one point Jim Cramer declared that a revolution was at hand. The banks were all broke. Nationalization was well nigh certain. Stimulus was dead on arrival. Every stock market rally was a false hope. Depression loomed.

But no, the papers and cable stations continue to be crowded with faces offering opinions, often in loud, pushy and smugly confident voices.

On Monday, hedge funder Jeff Matthews sounded the most sensible note of all in his Jeff Matthews Is Not Making This Up blog, with a post he headlined, "New Year's Resolution: Think for yourself." Matthews recounted a panel discussion in a Florida country club a year ago. The stock market was cratering, and even the great Warren Buffett seemed in retreat. Matthews notes that he was "elbowed aside" by a "Famous Strategist" who proceeded to scare the crap out of the audience of brokers and investors. Matthews kept notes. The economy would underachieve for several years, declared the Famous Strategist. There's a trillion dollars in losses still to be taken out of the banks. The government would have to nationalize financial firms "like Fannie and Freddie." We live in an era of reduced expectations that will last for years, so investors should seek safety in fixed income.

To be fair, and Matthews is (for one thing he doesn't name this strategist), not all these statements are crazy, particularly given the moment. Even today, the economy looks like it will underachieve -- not unexpectedly following such a serious financial crisis. He scoffs, however, at the trillion dollar in losses and the nationalization theme. And for investors, going into fixed income just as the rally was beginning was about as wrong as you can get. As Matthews says, "Those CFAs who took the Famous Strategist's advice that dark February night and dumped their financials and stashed the proceeds in safe Treasuries are certainly wishing they had" -- meaning, they had thought for themselves. Oh, and Buffett's Goldman, Sach & Co. (NYSE:GS) play came out pretty well too.

The lesson here is that if predicting the economy correctly is a stretch, forecasting the market is worse. Yet the temptation is always there, and folks take their shot. Consider the new issue of Institutional Investor, which declares "The Future of Wall Street" over a photo of Barclays Capital chief Robert Diamond. Does that mean Diamond is the future of Wall Street, or Barcap, or investment banks attached to large foreign banks that picked up failed U.S. firms at a song? That's never really clear and, to be fair (we seem to be saying that a lot), II notes in its introduction to the package that, "What's less clear is what lies ahead for the firms that have survived the devastation."

But while II hedges its bets in stories on Barcap, Goldman and Citadel Investment Group LLC, it does offer a piece that essentially argues that the equity culture that has prevailed at least since the early '80s on Wall Street is now dead or dying -- or as it says in its internal table of contents: "R.I.P. Equities, 1982-2008," though, to be fair one more time, the headline on the story itself says "The Equity Culture Loses its Bloom." Now this is a provocative thesis. If it's true, then everything from private equity to M&A to mass private savings for retirement to compensation would be radically transformed and dramatically reduced. This would resolve many of the charges of an "over-mighty" finance that have been made since the crisis, shrinking the large firms, the big banks and Wall Street itself. It would (as the piece suggests) significantly diminish the profits available to seduce all those M.B.A.'s into finance, though it wouldn't necessarily deleverage the joint -- leverage being a matter of debt.

The demise of an equity culture is a scary, transformational idea, not unlike nationalizing the banking system or rolling back financial innovations to the '60s. However, the magazine offers lots of talking heads discussing the matter but no deeper mechanism, no explanation, for this sudden shift except that investors have gotten burned and are equity-averse (this resembles, by the way, the easy notion that Americans have suddenly become frugal because of the recession, which is wishful thinking at best). Many of the "decline of the equity culture" voices in II make much the same argument as Matthews' Famous Strategist: S&P 500 performance throughout the decade was negative, so let's avoid the damn things. The piece also resembles the infamous BusinessWeek "Death of Equities" cover in August 1979 that has come to mark, by II among many others, the birth, not the death, of the equity boom and to symbolize just how wrongheaded market prognostications can get.

Like BusinessWeek, like the Famous Strategist, II is trying to read the future by sorting through the confused debris of the recent past. Only in the last few paragraphs does the magazine admit that there are other voices that don't necessarily agree with the thesis -- those that argue, for instance, that a rebalancing of sorts between equity and debt is taking place (this may be a loss of the bloom), or that the losses of the past few years will resemble a mere blip in years to come. Well, the fact is, no one knows because no one truly understands the mechanism of an infinitely complex global market machine. But there's always the temptation. Even Matthews feels compelled to offer up near the end of his blog that he believes the crisis marked the beginning of the transfer of American economic supremacy to China, "much as the Crash of 1929 marked the end of Great Britain's." Perhaps. But given China's manifold and deep-set problems, perhaps not. Remember Japan. Besides, one of the demonstrable lessons of 2009 is not how similar our experience was to 1929, which is not quite the same thing as the Great Depression, but how very different.

Matthews' homily however still holds and bears repeating: In the face of prediction, think for yourself. Even if it is cold outside.

Robert Teitelman is the editor in chief of The Deal.