In a world where “nobody knows anything,” investors may be no better than film-studio moguls at predicting the future. If so, then markets, instead of being predictive, become increasingly reactive, simply extrapolating recent events.
LONDON – If there is one useful conclusion that economists and investors can draw from the crazy year that has just ended – indeed, from the whole crazy decade since the Global Financial Crisis of 2008 – it is this: As they say in Hollywood, “Nobody knows anything.” In the film industry, the richest and most experienced studios and producers spend vast amounts of time and money on audience research, but still have no idea if their latest creations will turn out to be hits or flops. So why be surprised if the same is true of financial markets – or, for that matter, of commodity prices, policymaking, and corporate performance?
Why be shocked if the world’s richest company admits, as Apple did after Christmas, that it has no idea how many iPhones it will sell in China? Or if the world’s best-informed energy traders predict a global supply shortage that will boost oil prices above $100, just when a supply glut sends the market tumbling to $50? Or if the US president doesn’t know if he hates or loves global trade? Or if stock markets predict a global economic boom when bond markets predict recession and then both reverse suddenly, contradicting each other in the opposite direction?
At this time last year, economic expectations were almost universally optimistic. Every region of the world appeared to be simultaneously booming for the first time since the 2008 financial crisis. Central bankers were confident that they could safely start to withdraw their extraordinary monetary stimulus, and stock-market investors were almost unanimously bullish. Yet 2018 turned into the worst year for investors since the financial crisis, forcing central bankers to begin backing away from their plans to normalize monetary policy, economists to downgrade their growth forecasts, and many businesses to prepare for recession in 2019 or 2020.
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