By
Sy Harding
:
Big picture analysis, and the predictions of calamities that are
sure to hit down the road, are fun to read. But such long-term
forecasting is almost always based on the favorite forecasting tool
of scientists and economists -- extending current trends in a
straight line into the future, without considering that trends only
continue until conditions change. So, as convincing as they seem at
the time, big-picture predictions rarely work out as expected.
That is illustrated by the fact that the world hardly ever comes
to an end. Yet for centuries "trend-extending" has regularly
predicted just such a result -- based on everything from holy wars,
black plague, and rising ocean levels in previous eras, to nuclear
weapons proliferation, depletion of the ozone layer, and the AIDS
epidemic, of more recent times.
The fault in such thinking is not only that trends continue only
until conditions change, but that when trends are troubling, people
and forces respond to bring about those changes.
Vaccines are developed for polio, TB, AIDS, bird-flu and mad-cow
type epidemics and pandemics that periodically threaten to envelop
the world, with the feared trends actually resulting not in
annihilation of the human species, but in an improvement in life
expectancies.
In the 1940s and 1950s, by extending the trends of population
growth and food production, it was scientific fact that the world
was on a collision course with massive starvation. Best-selling
books like
The Population Bomb, Famine 1975
, and
Our Plundered Planet
predicted worldwide famine by the 1970s in which hundreds of
millions of people would die, with a "substantial increase in the
world death rate."
Other studies showed that even in the U.S., there would not be
enough land to feed the growing U.S. population by the year
2000.
But farmers worldwide learned new soil management, new cattle
feeding and breeding techniques. Science developed healthier seeds
and feeds. Farm machinery manufacturers provided more efficient
equipment.
And rather than the "big picture" prediction of a worldwide
starvation catastrophe and substantial increase in the world death
rate, in reality, the global death rate
declined
substantially, and average calories consumed per person
increased
by 24%, even though the population of the world doubled.
In the U.S., widespread starvation was not only avoided, but the
trend reversed to the opposite extreme -- of food surpluses,
overflowing government food warehouses, gifts of surplus grains to
foreign countries, and even subsidies to farmers to leave fields
unplanted.
Governments are certainly not immune to the fallacy of extending
current trends as a means of forecasting the future while ignoring
the history.
In the 1980s, U.S. government budget deficits surged to new
record highs as the Reagan Administration dramatically hiked
government spending in efforts to pull the economy out of the
stagflation malaise of the 1970s.
Economists, extending that trend in a straight line into the
future, competed with each other with dire forecasts of how soon
the country would be bankrupt.
However, in the 1990s, the return of a booming economy allowed
government spending cutbacks without harming the economy, which
combined with a big surge in tax revenues from rising corporate
profits, and capital gains taxes created by the explosive stock
market of the 1990s, not only produced a balanced budget, but
several years of large budget
surpluses
.
Not surprisingly, by 2000, the previous negative trend was
forgotten and the new positive trend was being extended in a
straight line into the future. Congress began making plans to spend
the budget surpluses that economists were now projecting would
continue for several decades. It was being projected that within 10
years, the entire U.S. national debt would be paid off; Social
Security would be completely funded; and the population could be
provided with full healthcare. There would even be plenty left over
for tax cuts, and increased spending for defense and education.
Once again, that trend only lasted until conditions changed.
The stock market plunged into the severe 2000-2002 bear market,
depriving the government of the healthy capital gains taxes it had
been receiving. The economy plunged into the 2001 recession.
Workers lost their jobs, causing the government's take from income
taxes to also nosedive. The 9/11 terrorist attacks took place,
resulting in large increases in government spending for homeland
security. The invasions of Iraq and Afghanistan followed, with
their escalating costs. The picture reversed again. Budget
surpluses became large budget deficits.
The 2008 financial meltdown and "Great Recession" then hit, and
the budget deficits grew even larger, reaching new records as
massive and costly stimulus efforts were undertaken to prevent the
recession from becoming a full-blown Depression.
Not surprisingly, as the budget deficits have reached record
levels, economists are now extending
that
trend in a straight line into the future, returning to predictions
that the Social Security system will soon be bankrupt, the country
will face dire healthcare shortfalls for decades, providing school
and other public project funding will be an insurmountable problem,
and it will be near impossible for government budget deficits and
debt to ever return to normal and manageable levels.
And so it goes, cycle after cycle, as conditions swing back and
forth from one extreme to the other. Sometimes the pendulum catches
a tailwind, and a trend lasts longer than usual. But at some point,
the pendulum reaches an extreme and begins to swing in the opposite
direction.
I was reminded of that in recent days, on reading of yet another
dire big-picture prediction that has taken an unexpected turn.
It was not many years ago that it was predicted that at the rate
the U.S. was consuming oil, its domestic sources of oil were being
depleted, and its imports of foreign oil were soaring, the U.S.
economy would soon be at the mercy of OPEC and foreign oil
producers.
But trends only continue until conditions change.
Now, it's being projected that the U.S. will surpass Saudi
Arabia as the world's biggest oil producer by the year 2017, and
will eventually become totally energy independent.
However, nowhere is the tendency to extend trends in a straight
line into the future without expectations of reversals more
prevalent than in the world of investing.
Infamous historical events like the "Tulip Bulb Mania," "South
Seas Bubble," the "Florida Land Bubble and Crash" in the 1920s,
(and more recently, the real estate bubble in 2006), the stock
market bubbles in 1929 and 1999, are extreme examples of the "this
time is different -- extend the trend endlessly into the future"
events that turned around to bite investors savagely.
But on a smaller scale, extending current trends into the future
is also what entices investors to buy more enthusiastically
after
rallies and bull markets have already made big gains, often even as
so-called 'smart money' institutional investors and other
professionals have begun selling into that final strength.
In the other direction, investors tend to finally sell in
disgust, and lose all interest in the market after a significant
correction, and more so after a bear market, then extending the
negative trend in a continuous line into the future, often even as
so-called "smart money" institutional investors and professionals
have begun buying again at the bargain prices.
The obvious lesson from the economy and markets is to think
cycles, not endless trends; to downplay, if not totally ignore, the
predictions from big-picture analysis that are based on extending
whatever are the current conditions, and whatever is the current
trend, in a straight line into the future; to keep in mind that
there are always forces coming into the picture, not always
discernible at the time, that are intent on changing the conditions
and therefore, the trend.
Just a few thoughts to ponder as the stock market tumbles, and
big-picture analysis extends the trend of the last couple of years
of dysfunctional politics in Washington, predicting dire long-term
consequences, even as there is increasing evidence of work being
done to reach a compromise and end the dysfunction.
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
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