Friday 22 February 2019

Eddie Hobbs: Confidence needs to be tempered with caution

The frailty of the human mind and unforeseeable events mean optimistic forecasts carry some risk

Sean Fitzpatrick
Sean Fitzpatrick
Tom Parlon

Eddie Hobbs

It's that time of the year when, relying on shaky economic models, hubris and groupthink, attempts are made to forecast the next 365 days, a measurement of time decided by a dead Roman Emperor over two thousand years ago.

Of course, forecasts are invariably wrong, it's just a question of by how much. Determining the long-term direction of mega-trends such as population ageing, oil depletion or new technologies is tough enough, but precise forecasting is a lottery, there's just too many moving parts, incomplete data and dodgy economic science to process it and then there's the inevitable unexpected game-changing event, which can be positive like inventions that ramp up productivity -- the jet fuel upon which rising prosperity is sustained -- or, negative ones, like 9/11.

Still we try and, remarkably, this year the overriding sentiment seems to be upbeat, positive and enthusiastic throughout the media, sensing that readers are fed up, that the economic mercury is rising and it's time to get with the mood music. What's unnerving is the unusual strength of that consensus -- that 2014 and beyond is going to be characterised by several years of modest economic growth, that quantitative easing has worked, that all the excess debt and the new debt added since the 2008 crisis can be serviced in a benign environment of open-ended low interest rates, rising employment and asset price recovery, especially in property and stock markets.

The worry is that the consensus is too damn perfect, as a global economy has its IMF forecast uplifted from 2.9 per cent to 3.6 per cent. Forecasters almost universally see continued strong recovery in the USA with jobless numbers falling to 6.5 per cent, Chinese deceleration flattening at 7 per cent and Europe avoiding Japanese-style deflation by coming in at 1 per cent for 2014. All the debt is to be washed away, digested in a cocktail of microscopic interest rates, quantitative easing and, well, confidence. Confidence is the key, confidence that European policymakers will deliver their new mechanisms, like ESM, credible stress tests and a banking union, confidence that the dollar won't crumble under the USA's deficit financing and confidence that developing markets will continue to accelerate, helped by export recoveries and positive capital flows.

But the truth is that it's all quite fragile, this popular soft landing. To its left lies another outcome such as a joust with deflation, especially in Europe where the pace of reform is a function of the distance from the last existential crisis where, for example, Spanish unemployment maroons a quarter of its adult population while its economy remains 30 per cent less competitive than Germany's. To the right lies the possibility that central bankers, fearful of strangling the recoveries, will delay anti-inflationary measures for too long, miscalculating as they attempt to balance the accelerator and brake.

So let's revisit some past forecasts to put this week's star-gazing into some perspective, reminding ourselves of the frailty of the human mind and creaky economics upon which it relies for guidance -- where education, experience and, sometimes the data itself can be overwhelmed by the natural desire to herald news, especially when it serves agendas and feels good.

Herbert Hoover, 1928: "The United States are nearer to the final triumph over poverty than ever before in the history of any land."

Economist Irving Fisher, October 15, 1929: "Stock prices have reached what looks like a permanently high plateau."

Sean FitzPatrick, Irish Times Property Awards, September 2005, on RTE: "This is not good. I'd genuinely worry that much of the nonsense he peddled would gain common currency and that the wholly unbalanced Hobbesian perspective on Ireland of 2005 would fuel the anger of many of those who failed to benefit from our economic success thus far."

Press Release, April 17, 2007: "Property Consultants CB Richard Ellis today dismissed last night's Future Shock -- Property Crash programme, which explored the possibility of a housing crash in Ireland over the next few years, as 'irresponsible journalism'."

Bertie Ahern, former Taoiseach, April 28, 2007: "On the other side of the election we'll get back to normality. And I think that normality will be the soft landing. The construction projections were that we will move from something like 93,000 houses to 80-something. Now that's not going to create any kind of difficulty."

Joseph Cassano, head of Financial Products, AIG, August 2007: "It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these credit default swap transactions." In March 2008 he was forced to retire, the US insurance multinational was bailed out by the Fed.

Ben Bernanke, chairman of the Fed, January 10, 2008: "The Federal Reserve is currently not forecasting a recession."

Tom Parlon, director general of Irish Construction Industry Federation and former minister, February 11, 2008, Newstalk: "We're at, or very close to, the bottom now and it's turning around."

Donald Luskin, US investment commentator, September 14, 2008: "Anyone who says we're in a recession, or heading into one -- especially the worst since the Great Depression -- is making up his own private definition of 'recession'."

Brendan Burgess, large private investor in Irish bank shares and founder of website askaboutmoney.com, September 16, 2008, RTE News, the day after US fourth largest Investment Bank, Lehman Bros, had filed for bankruptcy: "Irish banks are very well regulated, Irish banks are very sound . . . I think we are going to look back in a few years time at the state of the Irish banks and the Irish stock market generally and say how we did not fill our boots with those shares."

Dermot Ahern, former minister, October 15, 2008, Newstalk: "The housing market is at the bottom."

Patrick Neary, former CEO Financial Regulator, Irish Times, October 14, 2008: "Ireland's banks are solvent and will be able to offset potential losses on property loans with better-performing loans."

Irish Times, October 24, 2008, Finance Minister Brian Lenihan has said the bank guarantee scheme was "a necessary first step" and "the cheapest bailout in the world so far".

The standout spot goes to Donie Cassidy, hotelier, property investor and former Fianna Fail leader of the Seanad, April 10, 2008: "Now is the right time to buy. We have a duty to tell first-time house buyers, young couples with no previous experience, that there is unbelievable value in the marketplace today. It will not last forever. It is never the wrong time to do the right thing. I offer the House the benefit of my experience and my opinion which is all any member can do. I will remind the House, perhaps in 12 or 18 months, when prices have again increased by 25 per cent or 30 per cent, that they were told this by the leader of the House on this historic day, the 10th anniversary of the Good Friday Agreement."

Three years earlier when as a Fianna Fail TD he'd led Government fury over TV polemic Rip off Republic, comedian Niall Toibin had urged Donie Cassidy to pull the sliding roof back and go for it, bald-headed.

Evidently he'd listened.

Irish Independent

Today's news headlines, directly to your inbox every morning.

Don't Miss