On Forecasts and Forecasting

“If trouble comes when you least expect it then
maybe the thing to do is to always expect it.”
Cormac McCarthy, The Road

Citing a ten percent increase in this year’s occupancy rates over 2010, area hoteliers (our principal industry being tourism) say they expect 2012 to be “a gangbusters year.” Nothing would make me happier–some of these guys are good friends. But, citing the recent past as the basis for a forecast is THE error that economic forecasters always make. Past is prologue, but the task is to identify the point in past cycles that corresponds to the present.

There are times when a trend can be expected to continue. This is not such a period. Most market indexes peaked in 2000, and the market has formed a massive top since then. The nearest comparison to the situation today is April, 1930. After a significant counter trend rally, experts agreed that the market and the economy had stabilized. Instead, the market turned back down and lost most of its value over the next two years, bringing on the Great Depression.

This time, the contra trend rally from March 2009 ended in April 2011. The most recent minor degree rally is very close to running its course. Time cycles from 4 years out to fifty years are now in a hard down mode, so the next year should be the worst of the bear market.

The Wave Principle has been indicating this outcome for some time, now. As investors, we’ve prepared by getting out of all investments, and hold only cash. For an outcome other than what we expect, we will need to see our indicators change radically from their present readings. If that happens, we will reinvest.

I am confident of the Wave Principle forecast. What interests me now is how a systemic collapse in the global financial system gets put back together. There is ample precedent for this. Given that this top is one degree greater in magnitude than the 1929 top, we need to start with the recovery after the last Grand Supercycle bear market, which occured in the mid eighteenth century. But my plan is to study the broadest range of historical instances I can. Thanks to an awesome Amazon gift card I got for Christmas, I’ve ordered all the books in the list I’ve been compiling for my survey. Here’s what I’ll be reading over the next few months:

The Origins of Political Order: From Prehuman Times to the French Revolution, Francis Fukayama

Debt: The First 5,000 years, David Graeber

Casualties of Credit: The English Financial Revolution, 1620-1720, Carl Wennerlind

The Post-American World: Release 2.0, Fareed Zakaria

World 3.0: Global Prosperity and How to Achieve It, Pankaj Ghemawat

I intend to dig into this mountain of scholarly work to find nuggets I can riff on with posts that make sense to me, and hopefully to my readers. Most of the list was suggested by Venkatesh Rao, a polymath whose erudite blog posts make mine seem like the work of a third grader in need of a tutor. Venkat is surveying the same material for his own take on things and he’s a terrific thinker, so I recommend his Site. Check out: http://www.ribbonfarm.com/.

It will be said that I’m obsessed with doomsday scenarios, and that was the case for many years. But every collapse is followed by a recovery. I want clues as to what a recovery from a crash of this magnitude will look like so that I can be a cheerleader for the next bull market from the get go.

Cheers,

Rod

The author makes no representation as to the accuracy of the quoted material, but believes the sources to be reliable. No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

 

 

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