By Alan Steel
Ever wish for a little clarity when confronted by all noise about the next recession, depression, waterfall decline and dead-cat bounce?
That search engine might just be one of the best recession-prediction busters ever invented.
First, you have to play spot-the-doomsayer. It’s an easy game to win. Just open a newspaper, click onto a media channel or tune into the financial news.
The Main Types of Doom
There’s usually a theme with the types of articles that these scribblers produce.
They’ll start by warning you about some recent significant market woe. Maybe they’ll compare this years charts with a dire moment in beak year like 1987, 2008, 2000 or even 1929, and/or align some single variable correlations (like how the price of cheddar cheese dictates the path of the S&P 500) to point to the next alleged apocalypse.
Then they’ll attempt to fix the alleged problem by bigging-up something like a new all-seeing stock market algorithm.
By example, one of my favourites is Raoul Pal’s Global Macro Investor on John Mauldin’s (more like Maudlin) ‘Thoughts from the Frontline’ bulletin.
Pal gets creative with the alignment between two-term US presidencies and the likelihood of recession.
“My friend Raoul Pal, in his latest Global Macro Investor, talks about the potential for a recession in 2017: ‘I recently noted that since 1910, the US economy is either in recession or enters a recession within twelve months in every single instance at the end of a two-term presidency… effecting a 100% chance of recession for the new President…Only Coolidge saw more than a year (sixteen months) from his second-term election and the onset of the subsequent recession at the end of WWI…Every single US recession bar one (with explainable circumstances) occurred around an election. Only two Presidents in history did not see a recession, and they were inaugurated after single-term Presidents.”
And there you have it: Instant Armageddon.
Or maybe not.
The problem here is one of consistency – or maybe the fact that this guy is consistently wrong.
So off to Google we go to check it out…
First, when you Google the phrase “Raoul Pal recession 2016” you come up with a number of hits about this recent Presidential apocalypse theory.
Will it come true? Well, at this point we don’t know. But let’s check how good Mr Pal is at predicting the future.
Take the search a step further and Google “Raoul Pal recession 2015”
That’s when something odd happens; it turns out that over a year ago Raoul said that, “Key indicators were signalling the start of a recession in the U.S. by the end of that year.”
Now try a Google search for a year earlier: “Raoul Pal recession 2014”
Same conclusion, different reasons. In 2014 we were apparently on the verge of, “The biggest technical break in the history of fiat currencies.”
Hmmm…I think there might be a trend here…
Well, in that year he told about how he, “Expects a series of sovereign defaults, the biggest banking crisis in world history, and asserts that we don’t have many options to stop it.”
Wow! Lots of fear but not much fact.
For perspective, recessions are significant declines in economic activity that last more than a few months across a variety of indicators, and they vary widely in terms of impact.
When they happen, things like GDP diminishes, unemployment rises and housing prices decline (in general terms).
But guess what, folks like Pal, Maudlin and so many other know that recessions are inevitable. In fact they are completely necessary for growth and to increase investment value over the long-term.
They also happen, on average, once or twice per decade.
What Pal and others like him appear to be doing year in and year out is simply playing the historical odds of the next recession arriving soon.
Keep that in mind when next you read about some gloomy prediction warning of the market’s impending demise – then Google the mystic behind the numbers.
Then Google the optimists and check their track records of investment success.
And when you find a good one, take his or her advice.
Because after all, it’s your money.