The problem with such warnings is that there’s always someone making them, which is why they are so often ignored. Indeed, a permabear can always be found to support the view that markets are about to take a turn for the worse. Economist Paul Samuelson once famously quipped that “stock markets have predicted nine out of the last five recessions”, taking a pop at those who place too much stock in the predictive quality of specific market indicators. Talking down the markets has nevertheless become an industry in its own right.
It is tempting to draw comparisons with the Greek myth of Cassandra, a Trojan princess imbued with the power of prophecy but the curse that no one would believe the truth she spoke. But such a comparison would be nonsensical because no one has the power of prophecy, merely the ability to make better guesses about the future than others. When a permabear has previously proved right, it’s often more a case of the stopped clock – which always tells the right time twice a day.
I’d go further and argue that it is not even the job of economists – or anyone for that matter – to predict the future, but to outline a range of probabilities over the risks and rewards that lie ahead. Making predictions is a mug’s game and the views of anyone who says they can do it – usually because they have discovered some magic market signal – should be taken with a healthy pinch of salt. The Hindenburg Omen, one frequently cited precursor of doom which was triggered again this week, has been followed by a market crash only a third of the time it has indicated one (although it was triggered in the case of the mega-crashes of 1999 and 2008).
Perhaps a better way to assess such doom and gloom is in the round – in other words, when there are an accumulation of signals we should pay more attention. That is exactly what we argue in this week’s cover feature – in fact, we have been genuinely worried that the tipping point would come before we had a chance to publish it, such has been the build up of indicators associated with previous crashes. Markets have indeed begun to weaken, and while that could be a reflection of general seasonal summer weakness, it could also mean the momentum trade that has powered them higher has come to an abrupt end – so even if a correction does not come, the days of easy index gains are almost certainly behind us.
