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Rekenthaler Report

Are Economic Predictions Ever Useful?

It is difficult to determine how.

Hindsight Bias
Economic predictions are wonderfully useful...after the fact. A fund manager sent back to 1973 and stripped of his investment memories, save for knowing that inflation and commodity prices would soar for many years before subsiding, would thrash his rivals over the ensuing decades. He would be long commodities and short bonds, before switching to stocks in the early 1980s. Toss him a second tidbit--the 2008 housing collapse--and his victory would be complete. His fund would have the best 35-year track record in the business.

One might conclude that our predecessors were dolts. What did the investors of the 1970s think would happen, with a rapidly expanding money supply and oil shortages? Of course inflation would surge. And of course, it would eventually be contained by the Federal Reserve’s extreme tightening, under Chairman Paul Volcker. These would seem to be obvious outcomes. (As, per The Big Short, was the future housing crisis.)