We go out in the world and take our chances
Fate is the weight of circumstances
That's the way lady luck dances
Roll the bones
The silly season is upon us again. That time of year when Wall Street pundits bring out their crystal balls, dust them off, and predict the markets future. This annual ritual never ceases to amaze me, not that people try to predict the future, but that normally sane people actually listen to them. As Yogi Berra once said, "Its tough to make predictions, especially about the future."
There was a time when I was paid to make these forecasts too. I tried to take as much guesswork out of it as possible, I'd use mathematical models and regression analysis, and I'd come up with a story and a number that sounded logical. But no matter how hard I massaged the data, the fact remained the same, no one can predict the future.
Last year the Wall Street strategists predicted that in 2011 the S&P 500 would rise by about 9%, with a range of 0% to 18%. With an incredibly wild ride the S&P 500 is up about 1% on the year. I guess that's within the range, but it's certainly not helpful.
I'll admit that it once was a tad easier to at least get close to a factual number. In the old days you could look at the economic cycle, make a reasonable estimation of sales growth, profit margins, and earnings, assign a P/E multiple and come up with a pretty plausible estimation of the markets expected performance.
There is actually no hope of that today. While sales growth, profit margins, and earnings are still relevant variables, their significance in determining potential market returns has been greatly diminished. Today the known unknowns trump any company specific data. Will the euro zone breakup? Will China's economy slow too sharply? Will bipartisan squabbling in Washington derail our nascent recovery? In the first three months of the new year, Italy needs to raise about $172 billion to pay holders of existing debt coming due. Will they or won't they? And if they do, at what price to theirs and Europe's economies? Roll the bones.
That's just a light touch on the known unknowns, what about those pesky little unknown unknowns? Those events that hit us once every hundred years that seem to be happening at least every 18 months. This year we had a devastating earthquake and tsunami, an Arab spring which saw several monarchies tumble, and the marriage/divorce of a Kardashian. Not all unknowns are catastrophic though, some like the accession of Apples iPhone, iPad, and social media have been godsends, except for Blackberry, Eastman Kodak and numerous middlemen. Unknowns can change the world in good and bad ways, the only certainty is change. What unknowns will impact 2012? Roll the bones.
So much of the last couple of decades growth was driven by a massive increase in debt, derivatives, and fiat currencies. It is clear that we have reached a tipping point in the growth of this debt bubble, but how it deflates and the pain it inflicts are still unknown. It is my expectation that volatility and turmoil will be as much of our 2012 as it was in 2011. We will continue to be defensively positioned and flexible. Our goal remains to be in harmony with the markets, participate when they are working, and standing to the side when they are not.
Here's a prediction for the New Year that I'll hang my hat on, "I predict future happiness for Americans, if they can prevent the government from wasting the labors of the people under the pretense of taking care of them." -- Thomas Jefferson