Deuteronomy 18:10-12 (KJV):
10. There shall not be found among you any one that maketh his son or his daughter to pass through the fire, or that useth divination, or an observer of times, or an enchanter, or a witch.
11. Or a charmer, or a consulter with familiar spirits, or a wizard, or a necromancer.
12. For all that do these things are an abomination unto the LORD: and because of these abominations the LORD thy God doth drive them out from before thee.
If an economic forecaster found himself plying his trade in ancient Israel, it wouldn’t be long before an outraged community dragged him kicking and hollering to the outskirts of the village and stoned him to death.
Especially if they followed his investment advice.
Economic forecasting has not covered itself in glory the past few years. For a profession focused on predicting the future, few professional economic forecasters came close to foreseeing the coming economic cataclysm. Yet the most unlikely of people, even my friend Drunken Haiku Lawyer, saw it coming.
Drunken Haiku Lawyer is a self-declared Enemy of Capitalism. Starting out as a junior Fascist in high school (“speed limits enforce public order”), he morphed into a Libertarian as an undergraduate (“speed limits are oppression”) and then hardened into a Bolshevik in law school (“speed limits save the whales”). Many are the times I heard him openly thirst for Milton Friedman’s blood and long to gnaw on Hayek’s bones. “Austrians are particularly tender” said Drunken Haiku Lawyer. One day, he reflected that it would be nice to napalm the University of Chicago, dig up the campus, napalm the dirt, grind the alumni of the University of Chicago School of Business into a fine mulch, and sow the campus with salt and ashes so that no economic theory would ever emerge again from its barren, accursed soil. Chicago delenda est.
Yet he can’t fill the void in his soul where the burning embers of the University of Chicago should go. You see, Drunken Haiku Lawyer sold out. After law school, instead of becoming a penniless crusader for justice, he became a well-compensated plaintiff’s attorney for the very soulless corporations he swore to destroy. Choke chain held tightly by the Man, Drunken Haiku Lawyer can do little to indulge his urge to purge. All that remains is the burning shame of knowing he is a certified class traitor. Drowning that eternal flame is what all the whiskey is for.
I started a stock market simulation in mid-2006 so I could experiment with value investing strategies. On a lark, I invited the frustrated commissar to play as well and, much to my surprise, he actually played. By the end of its run a year and a half later, my various strategies had fizzled out but Drunken Haiku Lawyer had returned just over 100%. He had shorted Fannie Mae, Freddie Mac, Wells Fargo, Washington Mutual, the home builders, and other heroes of the housing bubble. He generated a massive paper profit. So what, besides the inevitability of dialectical materialism, had given Drunken Haiku Lawyer novel insight into the workings of our capital markets?
It turns out, most of the senior partners in the law firms he worked with had trophy wives. Living in southern California, most of those trophy wives were normally aspiring actresses. At the height of the southern California housing boom, suddenly they all wanted to be realtors. He reasoned that if trophy wives wanted to be realtors instead of actresses, the housing market was horribly overvalued and the end was near. All that remained was going to the Finland Station and waiting for the Revolution.
Despite being shown up by the Revolutionary Vanguard and other amateurs, economic forecasters continue to forecast. Worse than that, people continue to believe them. Billions of dollars move on the strength of this prediction or that prediction. Yet the chance that an economics degree confers the ability to predict economic growth in 201o, 2011, or 2050 is just about zero. You could predict alien invasion for November 2012 and have just as good a chance of your prediction coming true as an economic forecaster has of successfully predicting the ups and downs of the market.
Nassim Nicholas Taleb made this simple proposal: every professional prognosticator should have his prediction success rate clearly posted for public reference. If your favorite economic pundit is hitting .001, it’s time to find something more reliable. Plenty of dartboards and Ouija boards are on sale. Just remember to count the trophy wives.
Cross-posted on the Committee for Public Safety.