Home » Economy » Back to the Future, Part 1: Prediction Fatigue

Back to the Future, Part 1: Prediction Fatigue

by John Rubino on August 14, 2013 · 17 comments

It’s around 10 o’clock on a Friday night in early 2005. I’m shooting pool in a local bar with Hunter, a math professor at the local university who had just come into a big inheritance and was tossing it around like the found money that it was. He had recently paid cash for a house and taken his new girlfriend to Vietnam, and had (to get to the point of this post), after a few long talks with me, concluded that the housing bubble was about to burst and the banks and home builders were once-in-a-lifetime short candidates. He’d committed a fair chunk of change to put options on those companies in eager anticipation of their collapse.

But not only had the collapse not come but those stocks had risen, sending his options bets into freefall. On this night, he’d had enough. “Listen,” he said, “I can’t think about this anymore. Maybe it’ll happen, maybe it won’t but we’ve said everything there is to say, so let’s find something else to talk about.” We shifted focus to the game at hand, which also had money riding on it, and didn’t talk stocks for the rest of the night. Very discouraging. A friend had placed a big bet on my recommendation, had lost money and was pissed.

We didn’t know it at the time, but Hunter and I were experiencing something common among those who like to bet against bubbles: prediction fatigue, that (sometimes very long) stretch of purgatory that starts when you become certain that things are out of control and a crash is imminent – and runs until the crash actually takes place. Junk bonds, for instance, were clearly a bubble in 1988 but didn’t implode until late 1989. Tech stocks were classic short candidates in 1998 but doubled one more time before tanking in 2000. Housing stocks were garbage (along with most of the mortgages then being written) by 2004, but then they did this:

Housing stocks 2005

It was March 2006 before they started to roll over, and even then they staged a serious relief rally before entering their death spiral in 2007. By that time Hunter had closed out his options, I had been forced by my brokerage house to sign a waver stating that I remained short the banks over their strenuous objections, and millions of other people who had correctly diagnosed the housing bubble but bet against it too soon had lost their shirts. (I hung in and ended up doing pretty well, though not nearly as well as if I’d waited two more years to short everything in sight.)

Now here we are again. An insane round of global debt monetization has inflated another series of bubbles. Stocks are generally as high as they were in 2006. Treasury bonds, despite a recent correction, are as overvalued as tech stocks in the late 90s. Junk bonds are rocking. Even housing is coming back. The sound-money community understands all this, realizes that the new bubble will burst just like its predecessors – and is sick of hearing about it.

A DollarCollapse a reader illustrated this frustration with the following:

For how many decades have we been hearing about threats to Israel, Iran’s imminent nuclear capabilities, instabilities in the Middle East threatening a third world war, local skirmishes getting out of hand, and oil supplies being cut off? The 2009 “suckers” stock market rally, the demise of the EU and the euro, China this, China that, Japan is going to crash, Fukashima may be a world-wide disaster, the US dollar is going to crash, interest rates are sure to rise, gold and silver are going ballistic, gold and silver are in bubbles, gold and silver may crash, debt is the problem, debt is not the problem, debt doesn’t matter, when the Fed stops QE things are going to crash, the Fed will never stop QE, if the Fed doesn’t stop QE things are going to crash, corporate profits are rising, corporate profits are falling, stocks are overpriced, stocks are under priced, the US is becoming fascist, the US is experiencing an entrepreneurial renaissance, there is an energy and manufacturing boom in the US, there is no recovery in the US, everybody wants to come to America, America is in decline, unemployment is falling, real unemployment is rising, the Fed won’t let the markets go down much, the Fed can’t keep the markets up indefinitely, central banks are buying gold, central banks are selling gold, there is a shortage of gold, there is no shortage of gold, the gold price is manipulated, the gold price is not manipulated, interest rates are rising, interest rates are falling, inflation is low, inflation is higher than it seems, inflation is really not as high as it seems, Europe is starting to grow again, Europe is stagnating, Europe is getting worse, the developed Western economies are in decline and the East is growing, North America is experiencing a revival, the developing economies are declining, the US stock market is the place to be, anyone still in stocks is going to regret it, bonds are in a bubble, bonds are still the safe haven, junk bonds are safe because of all the corporate cash, junk bonds are signaling trouble, mining stocks are the most undervalued of all, mining stocks are poised to go higher, mining stocks still have further to fall, mining stocks will fall if the overall market falls, mining stocks are a hedge against a market crash, the demand for oil is growing, the demand for oil is falling, the demand for oil is flat, fracking will make the US a net energy exporter, fracking will fail to live up to its hype, consumer consumption is rising, consumer consumption is falling, wages are rising, wages are falling, the glass is half full, the glass is half empty.

Yep. The stream of “this is it!” prognostication from every corner of the financial market (some of it coming from this site and most of it sounding very reasonable at the time) has been going on far too long, and everybody’s sick of it. But that it always seems to go this way implies that prediction exhaustion is a necessary stage in the process, akin to “capitulation” prior to a market bottom. Just when you can’t stand it anymore and are ready to wash your hands of the whole project, cash out, and get on with life, things suddenly go your way.

Oh, did I just make another prediction?

  • Tony D

    The worst site for “Silver and Gold prices to explode” has to be King World News. Their “experts” have been laughably wrong by so much it’s not funny. They are definitely working on the broken clock is right twice a day principal. Yes they will eventually be right but does it count when they’ve been wrong so often ?
    Personally I’ve desensitized to it all and just go about my business. When ABN AMRO can default on it’s bullion obligations and Germany takes SEVEN YEARS to get it’s gold back and there is no discernible market action something is wrong.
    The thing is that black swans, by definition are impossible to predict and it appears that the trigger to any crisis will indeed be a true black swan, If someone can predict it, it ain;t gonna be the trigger …….

  • Linda Hoskins

    I used to worry about it- now I don’t. I am fairly certain that in my lifetime gold and silver will go way up in value. So whenever I can I sock some more of it away. Simple and could make me a mint, while in the worse case it will still be worth something.

  • Bruce C.

    In retrospect I now think the bond brokers I knew (my father was a stock broker) were actually wise, and not as boring and unimaginative as I thought there were when I was young. I could almost always tell them apart just by the way they talked about things. They were so conservative and circumspect and seemingly “passionless.” Most of them were older than my father and had been in business for 30-50 years yet it never dawned on me that perhaps their un-speculative natures actually worked for them.

    I remember a number of conversations about finance, politics, and economics and they all were so boring. They would say things like, “We’re going to wait and see who wins the Presidency before doing such-and-such,” and “If the bill actually passes then we’ll wait and see what happens then,” and “I have no idea what interest rates will be then, we’ll just have to wait and see.” No “red meat”, no guesses, no speculation and no predictions. Nada. Boring, put probably wise and more healthful in the long run.

  • Agent P

    My not-so-new prediction gauge is: Lying. How much of it, and the pace at which it is increasing. Of course I’m talking about government $figures; CPI, Labor, employment statistics, etc. Along with denials of spying/capturing data on U.S. citizens, Snowden, the unfortunate demise of journalists who happen to get a bit too ‘close’, like Michael Hastings, etc. The whole house of cards that is our government is simply corrupt. So I base my predictions on how long a cup of Lies can be filled before it starts spilling over the sides. One thing is certain I think – the comeuppance is going to start small – perhaps seemingly insignificant, only to rapidly cascade out of control. It might be domestic, but as long as the bond market has buyers and the charade can stay running – who knows? Foreign policy blunders are the wildcard in my view however, that could Easily lead to economic calamity for the U.S., should one large, or any number of nations together, decide they’ve had enough – despite what dumping the $USD might initially do their own economies. This aspect I think is what is under the radar of most. We’ll see –

  • Dan

    I think you for got one. Too big to fail is going to fail again for the same reasons it failed the first time. And that you can take to the banks, if it’s still there tomorrow.

  • Joe_Wazzzz

    We hold these truths to be self evident; “Debt” as money is a ponzi scheme. Social Security is a ponzi scheme, Medicare is a ponzi scheme, Politicians can’t stop buying votes. Demographics is unalterable. Social behavior is cyclical. Today’s wealth is overwhelmingly based on oil. The fundamentals are obvious to anybody who wants to see them. Unless you are into, and good at, day trading, buy some precious metals as insurance and create a business that will be small and geared toward the future. Going backward is the new going forward and it has already begun.

  • Chris

    There are lots of wisdom in all the comments. Nobody wants the economy to collapse. The world will be in chaos and the masses will suffer terribly, though not from their own actions. Many economists shouted wolf not because they would like terrible things to happen but they earnestly want to warn people that they think something is very wrong. The present scenario is like a gambler who doubles each time he loses. Compare this with the Fed, who more than doubled, probably close to ten times, the bailout money every time the economy goes into recession. This method of bailout and flooding the banks with liquidity during recession was started by Greenspan when he headed the Fed. The gambler might win and then quit. But Fed cannot quit. Recessions are part of the business cycles of boom and bust. Even jailing the bankers in the past did not stop them from busting the system. This time is even worse as the same bankers that caused the 2007/8 recession were not even pursued by the government because they are too big to jail. Fed had to loan out about $10 trillion to keep the economy afloat with not much reduction in unemployment. The coming recession will be worse and will probably requires $100 trillion for bailout. This is not a viable number. As it is, Fed is already in the market. How is Fed going to save the market when Fed is in the market? The answer is, “we will never know”. Maybe Fed could keep the system going and the following recession will require $1 quadrillion to bailout. By then, there will be many trillionaires listed in the Forbes magazines and I do not know what kind of living standards the average person will have. This system might go on and on. But when it goes bust, it will be a supernova.

  • Bob

    Why would you even visit a website called ‘Dollar collapse’ if you didn’t, yourself, have some kind of thought or feelings towards such a future possibility taking place (Although some would posit that it already has). And let’s not be hasty. Not everyone get’s it wrong. Peter Schiff, while not everyone’s cup of tea, admirably nailed the housing bubble well before it popped. There’s plenty of web based video proof of that. My own father, a dockside crane driver all his life, always used to mumble on at the news shows about how this country can’t continue to function as it is, because eventually someone would realise that the UK produces nothing except “money from money”. My humble opinion, is that the current financial trend is not too dissimilar to watching a driver-less car slowly moving from park and beginning to career down hill towards a gathering of immobile spectators. The forces of nature determine and lead us to predict the most probable outcome (An outcome upon which the majority will place their bets), but there are still side streets, within where the car could end up, that may well make the end result completely different. Similar with the Dollar. The fundamentals don’t look great. A crash/collapse seems a certainty. But there’s a chance the manipulators have everything covered and it’ll just be a gentle bump. The car owner will return to his vehicle and drive off on his merry way leaving a group of very bewildered & wide eyed observers at the bottom of the hill in desperate need of a sit down and a stiff drink.

  • rp1

    Someone needs to save that email for the history books.

  • turkeydance
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  • Keisha

    im just worried i wont be prepared for it because of my own procrastination and lack of being able to find a job…i need to get it together asap because its going to happen and not one person around me even cares or has gotten prepared in any way.

  • Keisha

    um i just want to say that im against guns but im going to go buy one this week.

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  • Gann Disciple

    Haha this article was hilarious! It also demonstrates why you should learn to read price charts and not pay attention to what the talking heads on TV are blabbing about. You and your friend should have waited for a lower high and lower lows to print on the housing stock charts before shorting anything. Trying to pick exact tops and bottoms is a fool’s errand.

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