Pundits Predicting 'Crisis' and 'Crash' Deserve Our Haughty Laughter
When John Paulson began raising money for a fund meant to profit from future troubles in the mortgage market, he was somewhat of a joke on Wall Street. Michael Lewis writes in The Big Short that Paulson's Goldman Sachs coverage said he "was a third-rate hedge fund guy who didn't know what he was talking about." The trader handling his orders at Morgan Stanley said about Paulson that "This guy is nuts."
According to Gregory Zuckerman's book, The Greatest Trade Ever, Paulson wanted to raise $1 billion for his mortgage fund, but ultimately stopped at $147 million so skeptical was the smart money at the time. But as is well known now, Paulson's prescience and timing about the direction of mortgages eventually won him many billions in trading profits.
All of the above merits mention given the amazing frequency with which market and economic pundits publish articles predicting the next "crisis" and "crash." Readers know the titles well. Perusing some of recent vintage one can find "There's a new mortgage crisis brewing" (Richard Bove), "History Says There's a Crash A-Comin" (Robert Brokamp) "Please Be Warned: Even Greenspan Thinks a Crash Is Coming" (Mac Slavo), and just today "Stock-Market Crash of 2016: The Countdown Begins" (Paul Farrell). The individuals predicting "crisis" and "crash" in their columns, and the names previously mentioned are but a small number of the countless pundits who do, deserve the mocking scorn of readers.
Very explicit in their knowing commentary about the direction of the some of the deepest markets in the world is that in possession of a hotline to the future, they presently see what for instance John Paulson saw back in 2006. They're very clearly predicting future corrections, and yes, crashes, in the markets about which they're writing.
That they're so confident, or better yet confused, as to presume "crisis" or "crash" in their commentary is the surest sign that readers should dismiss their alarmism in haughty fashion. Indeed, if the many pundits who claim to see the future had a clue about where the next crisis or crash might be, they certainly wouldn't be writing about it for CNBC, Motley Fool, Contra Corner, or MarketWatch. As Paulson's billions make rather plain, if these predictors of doom truly had a keen sense of what would be on the front page of not-yet-published Wall Street Journals, they wouldn't be writing about it; rather they'd be earning billions alongside Paulson and others.
Even Paulson is frequently incorrect as his bet on gold presently reveals, yet this doesn't stop ordinary pundits from confidently broadcasting where the next crisis or crash will be. Paulson himself doubtless marvels at the ease with which the market and economic punditry see into the future; something this billionaire hasn't been nearly as successful at doing.
It brings to mind another billionaire investor in Peter Thiel. He too would acknowledge that the future is generally opaque. As he explained it in his highly entertaining book Zero to One, "most venture-backed companies don't IPO or get acquired; most fail, usually soon after they start."
Former trader Nick Kokonas recalled for readers in the 2011 book he co-authored with Grant Achatz, Life, On the Line, "If you are good, 49 percent of your decisions will be wrong. Even if you are great, something just short of a majority will be losers." Kokonas's essential point was that even the best traders, and Kokonas was very successful at the latter before becoming a hugely prominent restaurant impresario, are going to be wrong on a regular basis.
The best traders and investors in the world freely acknowledge just how hard it is to see what's around the corner, but pundits act as though it's simple. Oh well, once again, if they had a clue about future "crises," we'd be reading about them each fall in Forbes. That we don't is a certain sign that their predictions deserve our laughter.
One possible explanation for all the pundit confusion is that their definition of "crisis" is totally backwards. Paulson himself didn't predict a mortgage "crisis"; instead the true crisis was the mad rush into the consumption of housing itself. What Paulson predicted was recovery; as in markets are constantly adjusting for mistakes, and eventually they were going to reverse the economy-sapping consumption of wealth that was occurring to the detriment of the real, capital-starved economy.
The "crisis" in the banking sector didn't take place in 2008 when a number of financial institutions began to collapse; rather the crisis was the flawed allocations of capital that brought them to that point. The failure of banks and investment banks was a sign of a healthy capitalist system cleansing itself (Silicon Valley is defined by near constant failure, hedge funds go belly up at nosebleed rates, and both sectors thrive as a result), not a crisis. Had the feds allowed this healthy cleansing to take place free of bailouts, the "crisis" that this same class of pundits oddly describes as "financial" would never have been.
Billionaire investor Ken Fisher frequently notes in speeches a variation of "the markets have already priced whatever bad news about the future you think you know." That's of course what's so comical about the voluminous commentary predicting different versions of "crash." To take seriously the pundits who regularly employ "crisis" and "crash" is to believe that they possess information that has somehow been missed by the information machines that are markets themselves. Not very likely.
Missed by those so prone to yell fire in the proverbial crowded theater is that markets don't just suddenly "crash" as their commentary would have us believe. Again, the bad news they claim to know that will allegedly cause a correction is already priced.
A market "crash" is in truth the result of new information, information that pundits are generally oblivious to, entering the market. In 1929 it was the surprise news that President Hoover would almost certainly sign the Smoot-Hawley Tariff in 1930 (markets always price the future, not the present) on the way to greatly reduced global trade, and in 1987 it was Treasury Secretary James Baker's pointed commentary on the Sunday talk shows in favor of a weaker dollar. Crashes are once again the result of new information entering the marketplace, not what you, me, and the pundits already know. Markets could very well crash one week or one year from now, or per Farrell in 2016, but if they do it will be for reasons that have next-to-nothing to do with the commentary coming from crash-obsessed attention seekers in the punditry.
So in the future when you see a headline about a looming crisis or crash, turn the page, click the mouse, or both. A pundit with real knowledge about either would almost certainly not be writing about it. He would be too busy spending his investment billions.