Making Predictions

When I make predictions, which I frequently do, I make a point of not publicizing them too much. I don't want my personal pride to be tied up to them. I want to learn from my predictions. I want them to tell me something both when they are fulfilled and when they fail. Similarly, I don't want to be too secretive about my predictions. That would make it too easy for me to simply pick and choose past predictions, making it seem to me that I'm better at this game than I really am. So I post my prediction here on this blog as it is neither too public nor too private.

The point of making predictions isn't to be right, but to check if our understanding of the world is robust enough for us to make sensible choices. By making it a habit to predict outcomes of current affairs, we see how well we understand them. If we have skin in the game, we'll be able to take corrective action early if our  predictions start failing us, and we'll be able to ride good predictions to the end if we keep getting them confirmed.

In this respect, failed predictions are as important as good predictions, if not more so, because failed predictions indicate an error in thinking or an erroneous understanding of reality. We can learn from failed predictions while good ones merely confirm that our understanding is more or less correct. Failed predictions tell us that reality is not what we thought it to be.

It was when I failed to predict the trajectory of this year's flu cases that I understood that the flu was not what I thought it was. For weeks on end, I kept making correct predictions about the number of cases and what sort of people would be reported to be sick. Then, quite abruptly, just when the flu was going to take off big time according to my predictions, everything stabilized as by magic. Right there and then, I knew that the flu was not what I had so far imagined, and I have ever since taken the whole flu thing with a big grain of salt.

Predictions are not wild guesses. They are based on certain models. When I made predictions for the flu, I based them on simple exponential theory. There was a doubling of cases every two days. There should therefore be a doubling of cases every week or so at the very minimum. This should then taper off as we neared the peak, and then head lower roughly as dramatically as it went up. When this failed to transpire, after having been true for weeks on end, it was clear to me that we were dealing with a hoax of some kind.

However, I was still able to make correct financial decisions based on the circumstances at the time. It was clear that there would be supply chain disruptions and damage to the economy no matter the true nature of the flue. Politicians were, and still are, acting as if the flu is an existential threat to humanity. Their actions have played out exactly as predicted even if the flu itself has failed to do so.

The stock market dropped off a cliff in March, sending the index lower quicker than in 1929. Then it rebounded in the exact same manner as it did back then. But this time, we hit a new all time high where we only hit a major retracement back then. There are in other words both similarities and differences.

From a fundamental perspective, the big difference between then and now is that we were on a gold standard back then, so the correct way to compare price movements is not to use dollars, but to use gold, and when we do, we see something remarkable. Relative to gold, the drop in the stock market and the subsequent rebound have been almost identical in magnitude.

It appears from this initial analysis that the actions of the Fed served to make the dollar moves in the stock market more extreme than they would have been under a gold standard. An analysis based on gold instead of Federal Reserve notes indicate that we're looking at a repeat of what happened in 1929 and into the 1930s. However, the repeat will not be visible in dollars. We will have to measure the price of stocks relative to gold to see the correlation.

My predictions for the stock market as we go forward is that we will see another drop and bounce, and that we will have these moves continuing for two years or so. Measured in dollars, each drop will be to a higher level than the previous drop, and each bounce will be to a higher level than the previous bounce. But in terms of gold, each drop will be to a lower low, and each bounce will be to a lower high. In terms of gold, we'll have the same 90% fall from peak to bottom as we saw back in 1929 to 1933. In dollars, things will look different, quite rosy in fact. But the purchasing power of the dollar will be wiped out. The average person will be hit terribly hard by price inflation.

To collaborate this prediction further, there's the phenomenon known as the 3 generation cycle. Mistakes have a tendency to repeat every 3 generations, and systems, both good ones and bad ones, have a tendency to collapse after 3 generations. The Soviet Union existed for about 3 generations. So did the Victorian era.

The reason for this is that the perception of history changes over time. At first, it's full of youth and vigour. Then it becomes the wise system of parents. Then it becomes the quaint old system of grand parents, and then the reason for the system is lost. With nobody around to explain why things are as they are, mistakes are repeated without much opposition, and entire systems get replaced with something "fresh" and "modern".

It is now a little over 3 generations since the 1929 crash. But it's less than 3 generations since Keynes wrote his thesis on economy. We are therefore likely to repeat the mistakes of the 1930s with the additional damage of inflationist dogma. Keynes has about 20 years left before he too is flushed out by the 3 generation rule. In the meantime gold will continue to do relatively well.

Making predictions

By John William Waterhouse - http://uploads6.wikiart.org/images/john-william-waterhouse/the-crystal-ball-1902.jpg http://www.wikiart.org/en/john-william-waterhouse/the-crystal-ball-1902, Public Domain, Link