Can We Predict the Future? Not in a Million Years!

Matt Wright, CFA® |

Deep down, most of us realize we can't reliably predict future events with much accuracy. But the potential rewards of being right are so tempting that business leaders and investors spend enormous amounts of time and effort trying to get an edge over everyone else, despite the odds. While some people, through luck or skill, will find success doing this, it seems unlikely to us that there is a positive payback in aggregate.

Many investment managers engage in portfolio strategies based on their own or others predictions, but SWA does not. Below, we outline two circumstances over the past decade that have had momentous economic significance while being anticipated by virtually no one. It leaves us wondering why others haven't learned from these lessons.

This Interest Doesn't Rate!

Economists discuss many things, but throughout history the idea of a negative interest rate has been a rare topic. Switzerland utilized negative rates in the 1970s as a measure to control its currency value, but outside of that it has been unheard of. Not only that, but up until about 2008 the idea of negative rates was widely considered implausible, notwithstanding isolated cases like Switzerland.

The Global Financial Crisis brought many shocks to the global economy and in its aftermath interest rates throughout much of the world declined sharply. By 2016, there were over a dozen countries that had issued trillions of dollars in government bonds with negative yields. Investors were knowingly locking money into an investment that would pay them back less than they put in – even now it still sounds crazy! Nonetheless, what seemed impossible just a few years earlier is now so common that economists have had to rethink the very concept of the interest rate.

When Oil Hit the Wrong Peak!

Geologist M. King Hubbert proposed his peak oil theory in the mid-1950s. The general idea was that oil production in the U.S. would peak in the late 1960s and then decline rapidly. Other countries would see similar patterns at different times and indeed, the world as a whole must experience the same thing at some point. For a global economy heavily dependent on petroleum, some forecasters foresaw economic disaster as oil prices would soar as supply fell off.

The trouble, as always, is getting the timing right. A little over a decade ago, it appeared that global oil production may finally be reaching its peak. In addition, with China's massive construction spree gobbling up commodities in the early 2000s, demand for oil was growing stronger. The conditions appeared to be in place for a huge spike in oil prices, potentially devastating the global economy.

In just a few years' time, the story has been completely flipped on its head. First, the Global Financial Crisis and the resulting slow economic growth rates throughout much of the world has put a dent in demand. In addition, a divergence in oil consumption began around the same time, caused by a slow but steady shift to alternative fuels. Developed economies such as the U.S., Eurozone, and Japan have actually seen net oil consumption flatten in recent years, while developing economies continue to increase consumption. However, the trend towards alternative energy is expected to continue to accelerate and eventually reduce demand across the globe. Forecasters are now, in fact, talking about peak oil demand possibly peaking at some point in the coming decades. This notion was not anticipated by the peak oil production theories.

Even Hubbert's original idea has run into trouble. His prediction of U.S. oil's peak and decline was reasonably accurate from around 1970 up to about 2010. But then an astonishing change swept in, causing U.S. oil production to surge past the levels last seen almost 50 years ago. Due to improved technology and techniques, the U.S. shale oil industry was transformed from a relatively minor source of oil a decade ago to a massive contributor to global oil production today.

Of course, we can't really fault Hubbert for not seeing this coming back in 1956, but that's kind of our point! Even modern oil industry experts didn't see it coming until it had pretty much arrived. This oil has literally been sitting in the ground for millions of years, but the ability to determine how readily we can get it out of the ground and how much of it we want to use can shift dramatically in a short time. The peak oil theory was busted on both the supply and demand side in the past decade - remember that the next time you see a talking head on a business channel confidently predict next year's oil price!
It's hard to understate the immense changes in economic thought we've seen in just the past decade. Since almost no one saw these changes coming then, why would we have any confidence that anyone will get it right this time?

If you've come to realize the folly of investing based on predictions but need help getting on a more rational path, contact us today.