Predicting the End of the World: The Mayan Calendar

Armageddon is upon us. That’s according to some people predicting the apocalypse based on the 5,000 year Mayan Calendar which ends today December 21 2012.

Yes doomsday predictions has always been with us.

From the Economist,

IT IS not only wild-eyed prognosticators, in lonely towers with an owl for company, who predict the exact date of the end of the world. It has been marked in the diaries of popes, preachers and reformers. It has shivered the blood of a navigator nearing the edge of the globe, a delicate painter of the rites of spring, a serial killer, and the great brooding scientist who uncovered the secrets of gravity and light. It has been calculated from the alignment of planets, the track of comets, the birth of Antichrist (variously identified), the rate of global warming, nuclear build-up, intriguing palindromes or symmetries in dates, or the ever-gathering entropy of wickedness in the world. Some forecasters place it safely in the far future; others expect it imminently. Some, forgetful of the old tale about crying wolf, put out a prediction regularly. The most terrifying give no date exactly, like the hen in Leeds, in northern England, whose owner wrote “Christ is coming” on her eggs and pushed them back up again. The date to squawk about? 1806.

In short the above represents a string of failed doomsday predictions.

As for the supposed Mayan holocaust, the Washington Blog notes that even modern day Mayan leaders dispels the "end of the world" predictions alluded to them  (bold and italics original)

But the truth is that the Mayans never said the world will end in 2012.

Archaeologists recently found a cache of Mayan calendars which goes thousands of years past 2012.

And current Mayan elders say that the world ain’t ending this year.

In addition, from the same source, Mayan leaders have turned the table suggesting that “the doomsday theories spring from Western, not Mayan ideas.”

Doomsday predictions sells because it rouses the base human emotions of fear or anxiety or insecurity.

And an even important point is that Armageddon forecasting has political implications. Vested interest groups sell fear in order to promote social policies, such as ecological or environmental agenda, which has had a poor track record.

Prediction is very hard, especially about the future a quote attributed to Yogi Berra a member of Major League Baseball's Hall of Fame. This applies to doom mongers as well.

Why Not to Pay Heed to the Prophets of Ecological Apocalypse

Emotions based issues sell because people are emotional animals. Yet among all the emotions it is fear which is most powerful. That’s why horror movies sell, stock market crashes occur [where fear is a symptom and an accelerator of the market process], and that’s why many fall prey easily to "fear" based politics (e.g. climate change, peak resources and etc…).

Doomsayers sell or are popular also because of many people’s attachment to the Pessimism bias or the bias which exaggerates the likelihood of a negative outcome.

The profound Matthew Ridley writing at the Wired.com chronicles a list of prediction failures made by prophets of the apocalypse or Armageddon.

Ironically, despite the string of utter prediction failures; fear based issues remain in high demand. These have been evident in four fronts of social affairs, particularly in chemicals, diseases, people and resources. Mr. Ridley calls them the four horsemen of the apocalyptic promises

Here is an excerpt from the article.

Religious zealots hardly have a monopoly on apocalyptic thinking. Consider some of the environmental cataclysms that so many experts promised were inevitable. Best-selling economist Robert Heilbroner in 1974: “The outlook for man, I believe, is painful, difficult, perhaps desperate, and the hope that can be held out for his future prospects seem to be very slim indeed.” Or best-selling ecologist Paul Ehrlich in 1968: “The battle to feed all of humanity is over. In the 1970s ["and 1980s" was added in a later edition] the world will undergo famines—hundreds of millions of people are going to starve to death in spite of any crash programs embarked on now … nothing can prevent a substantial increase in the world death rate.” Or Jimmy Carter in a televised speech in 1977: “We could use up all of the proven reserves of oil in the entire world by the end of the next decade.”

Predictions of global famine and the end of oil in the 1970s proved just as wrong as end-of-the-world forecasts from millennialist priests. Yet there is no sign that experts are becoming more cautious about apocalyptic promises. If anything, the rhetoric has ramped up in recent years. Echoing the Mayan calendar folk, the Bulletin of the Atomic Scientists moved its Doomsday Clock one minute closer to midnight at the start of 2012, commenting: “The global community may be near a point of no return in efforts to prevent catastrophe from changes in Earth’s atmosphere.”

Over the five decades since the success of Rachel Carson’s Silent Spring in 1962 and the four decades since the success of the Club of Rome’s The Limits to Growth in 1972, prophecies of doom on a colossal scale have become routine. Indeed, we seem to crave ever-more-frightening predictions—we are now, in writer Gary Alexander’s word, apocaholic. The past half century has brought us warnings of population explosions, global famines, plagues, water wars, oil exhaustion, mineral shortages, falling sperm counts, thinning ozone, acidifying rain, nuclear winters, Y2K bugs, mad cow epidemics, killer bees, sex-change fish, cell-phone-induced brain-cancer epidemics, and climate catastrophes.

So far all of these specters have turned out to be exaggerated. True, we have encountered obstacles, public-health emergencies, and even mass tragedies. But the promised Armageddons—the thresholds that cannot be uncrossed, the tipping points that cannot be untipped, the existential threats to Life as We Know It—have consistently failed to materialize. To see the full depth of our apocaholism, and to understand why we keep getting it so wrong, we need to consult the past 50 years of history.

The classic apocalypse has four horsemen, and our modern version follows that pattern, with the four riders being chemicals (DDT, CFCs, acid rain), diseases (bird flu, swine flu, SARS, AIDS, Ebola, mad cow disease), people (population, famine), and resources (oil, metals). Let’s visit them each in turn.

Read the rest here

I Told You Moment: Philippine Phisix At Historic Highs!

This is the fundamental problem with relying on macro-accounting tautologies; people often bring in causal arguments from economic theories without realizing they are doing so. Robert P. Murphy

The Philippine Phisix posted a blistering start for 2012, which also seems as a lucky initiation for me. That’s because the performance of the local composite benchmark has been realizing what I have been saying especially last December where I pounded the table on the likelihood of this occurrence.

Even better, the Philippine Phisix closed the week to take on the second spot as the best performer[1], based on nominal local currency, among global equity benchmarks (of 78 nations).

Where we had been told by an establishment analyst in a conference that the Phisix will NOT break into NEW highs unless the Euro crisis will get resolved, I argued otherwise.

As I wrote last December[2],

And even more, any hiatus from the perceived worsening of the EU crisis, which will likely be treated with the band-aid approach most likely emanating from massive ECB purchases and possibly from the US Federal Reserve, will likely lead to ASEAN bourses outperforming the region or the world.

This means that contra mechanical chartists and consistently wrong mainstream deflationists, my bet is for the Phisix to breach the August highs perhaps sometime within the first quarter of 2012. Again, all these are conditional or subject to the premise where global central banks will continue to unleash waves and waves of inflationism. Otherwise all bets are off.

Of course the other point is that charts patterns, as I previously noted, will not fulfill its gloomy portent which again validated my projections.

Charting theory says that long term patterns should have a stronger effect[3] than the short term, yet the 15 month bearish head and shoulder (blue arcs) has clearly been neutralized by the shorter 5 month reverse head and shoulder (red arcs).

In short, the limits of using chart patterns as an investing guide can clearly be observed in the above.

Breaking Out Amidst the Euro Crisis; Refuting Some Euro Crisis Bunk

The Phisix breakout DOES NOT come amidst the resolution of the Euro crisis.

Instead, as I have been repeatedly pointing out, aggressive ECB intervention will work to defer the impact of the crisis and give the pretext for the bulls and for the yield chasers to push up the markets.

Again as from the same article I wrote,

If global central bankers will inflate massively, far more than the market’s expectations from the adverse effects of the crisis then the answer should be a conditional “yes”.

This exactly is what has been happening as provided by the charts from Danske Bank[4],[5].

So far yields of Spain and Italy has positively responded to such ‘back door’ intervention[6] by the ECB, as debt auctions were reportedly oversubscribed as Euro banks took advantage of subsidized cheap loans from the ECB to acquire sovereign debt of Italy and Spain. Essentially the subsidized rates give EU banks breathing room to earn from the yield spreads and at the same time helps to finance government funding requirements.

Also, the above debunks the mainstream claims that Eurozone policy operates on a quasi “gold standard”. We won’t see monetary inflationism of such magnitude being conducted on a gold standard as this would result to capital flight or a massive outflow of gold reserves.

Writes Joseph Salerno[7],

Briefly, according to the Currency School, if commercial banks were permitted to issue bank notes via lending or investment operations in excess of the gold deposited with them this would increase the money supply and precipitate an inflationary boom. The resulting increase in domestic money prices and incomes would eventually cause a balance-of-payments deficit financed by an outflow of gold. This external drain of their gold reserves and the impending threat of internal drains due to domestic bank runs would then induce the banks to sharply restrict their loans and investments, resulting in a severe contraction of their uncovered notes or “fiduciary media” and a decline in the domestic money supply accompanied by economy-wide depression.

Also this refutes the masquerade about the alleged deleterious effects of austerity. There has hardly been a meaningful austerity (reduction of government expenditures or debt) taking place whether in Europe or the US.

This certainly has not the case in the US, where government debt has been replacing the deleveraging process being experienced by the private sector components as shown in the chart from PIMCO[8]

What has been happening instead in the Eurozone has been a transfer of resources mainly from the welfare state and the real economy into the highly politically privileged and protected banking sector and even to the arms or weapons industry (!), where the latter seems to be part of a quid pro quo agreement[9] with crisis affected PIIGS in return for bailouts.

And it is also absurd or simply false to claim that a dysfunctional banking system will aggravate current economic conditions in the Eurozone, which are premised on faulty assumptions that credit only drives growth.

Fact is, like Japan’s experience in the 1990s, as the bust phase deepened, credit supply flowed from the impaired banking system to the non-banking sector[10].

In Italy today, organized crime groups or the Mafia has taken over credit provision in many parts of their economy and was even reported as having assumed the “number 1 bank”[11]. So we seem to be seeing the same dynamics of having non-bank sectors taking over.

And this certainly has NOT been true with the US, where despite falling business loans, the US recession cycle ended in 2009. Credit conditions only bottomed out during the late 2010 way after the US economy have convalesced. Today, improving commercial and industrial loans seem to augmenting the current momentum fuelled by an inflationary boom.

Yet the mainstream gives us false choices premised on accounting tautologies premised on “400 years of accounting understanding”[12].

Try applying this to the stateless Somalia (or failed state as per media’s lingo) to see if such appeal to math and aggregates has been valid. Since there is no state (ergo government spending) such statistics becomes irrelevant. [Perhaps this could be the likely reason Somalia has been excluded in many statistics]

Yet the false dilemma being presented is that Europe’s policy option has been limited to a choice from the following: private sector leverage or public sector leverage or adjusting trade balances. The focus on accounting leads to a solution that requires MORE government intervention by acquiring MORE debt or by inflationism.

The fact is, what prompts for massive trade deficits and deficiencies in trade competitiveness has been brought about by the capital consumption effects of government spending and the boom bust cycles. Political, legal, bureaucratic and regulatory risks also contributes to the business environment uncertainties which put a shackle on entrepreneurship that drives competitiveness.

And proof to this assertion is that despite cheaper wages compared to their developed counterparts, as previously pointed out[13], the crisis affected PIIGS has been least competitive in terms of labor efficiency mainly due to bureaucratic and regulatory impediments. Most of the PIIGS rank nearly (except for Ireland) at the bottom relative to their counterparts in terms of Doing Business.

As for consumption effects of government spending let me quote the great Murray Rothbard[14], [italics original]

All government expenditure for resources is a form of consumption expenditure, in the sense that the money is spent on various items because the government officials so decree. The purchases may therefore be called the consumption expenditure of government officials. It is true that the officials do not consume the product directly, but their wish has altered the production pattern to make these goods, and therefore they may be called its “consumers.”

And boom bust policies likewise alters time preferences of consumers and producers that encourages consumption and misdirection of investments

Writes Professor Robert P. Murphy[15]

The low interest rates of the boom period mislead entrepreneurs into borrowing too much, but they also mislead consumers into borrowing too much and saving too little. This is physically possible because resources that otherwise would have gone into replenishing the capital structure are instead devoted to new projects or additional consumption goods.

Also the great Ludwig von Mises[16]

The essence of the credit-expansion boom is not overinvestment, but investment in wrong lines, i.e., malinvestment. The entrepreneurs employ the available supply of r + p1 + p2 as if they were in a position to employ a supply of r + p1 + p2 + p3 + p4. They embark upon an expansion of investment on a scale for which the capital goods available do not suffice. Their projects are unrealizable on account of the insufficient supply of capital goods. They must fail sooner or later. The unavoidable end of the credit expansion makes the faults committed visible. There are plants which cannot be utilized because the plants needed for the production of the complementary factories of production are lacking; plants the products of which cannot be sold because the consumers are more intent upon purchasing other goods which, however, are not produced in sufficient quantities; plants the construction of which cannot be continued and finished because it has become obvious that they will not pay.

In other words, what the mainstream cannot see as the principal cause of a society’s orientation towards consumption, hence the trade deficits, are government interventionism and the welfare state. The crisis affected Euro economies look as great examples of these policy induced imbalances.

And even worse is the reverential awe towards statistics as an accurate measure of the functioning economy, particularly via the GDP. Little do many understand that such spending biased statistics has been designed towards looking at the economy from the Keynesian perspective, and which in corollary, would lead to Keynesian policy prescriptions.

The fact is the GDP is a highly flawed metric.

Professor Bryan Caplan explains[17],

Gross Domestic Product is staunchly atheoretical. If someone spends money on X, X is GDP - even if "someone" is Congress, and X="a bridge to nowhere."

There are exceptions; most notably, the stats supposedly exclude "intermediate goods" to avoid double counting. I say "supposedly" because the list of "intermediate goods" is so inconsistent. Insofar as police protection and the military protect firms from harm, aren't the police and military intermediate goods? But despite these tensions, a big part of the philosophy of GDP is to eschew philosophical arguments about what's "really productive."

On reflection, though, the standard approach is anything but agnostic. Official stats tacitly make an extreme assumption: waste does not exist. Astrology counts, even though astrologers can't predict the future. Every penny of health care counts - regardless of its efficacy. The whole defense budget counts - even if it's provoking war rather than deterring it. Indeed, if two countries' militaries mutually annihilate, both countries count the cost as a benefit.

So the mainstream case has immensely been pockmarked by half-truths and by reading effects as the cause, all dedicated to the promotion of the status quo whose policies paradoxically constitutes the roots of the current crisis.

And more ironically is that their prescribed policies seem to signify as political insanity—doing the same actions and expecting different results—or as similar to engaging the mythical beast Lernaean Hydra[18] which Greek legendary hero Hercules fought as part of his second labor[19], where for each head that had been cut off from the hydra, two grows in replacement.

The crux of the matter is that current interventionist policies being applied by EU authorities have been contrived at bolstering asset prices in order to keep the balance sheets of the banking sector afloat, and in tandem, to ensure access to financing for the unsustainable welfare state.

So essentially, the tight interdependence of the banking sector and governments can be analogized as two drunks trying to prop each other up by consuming more alcohol which is continually being provided by the bartender (the ECB abetted by the FED).

And this has not been limited to the Eurozone. Mr. Ben Bernanke, the chairman of the US Federal Reserve, has reportedly been itching for QE 3.0, but this time, the Bernanke led FED appears to have changed tactic to focus on providing support to the mortgage industry[20] which may reduce political opposition than from the previous QE which concentrated on acquiring US treasuries.

Analyst and portfolio manager Doug Noland thinks the FED will make a go on a mortgage based QE3.0[21],

Fed is quite worried about Europe, global de-risking/de-leveraging, and the strengthened dollar. Especially if the euro faces additional selling pressure, the Fed will talk – and at some point implement- additional quantitative ease in hopes of dampening dollar bullish sentiment. With more Treasury purchases posing significant political risk, they’re cleverly building a case for buying MBS.

And I would add that since the mandated debt ceiling by the US congress has already been breached[22], there seems to be a big likelihood for another accord to hike the debt ceiling levels, of course after some vaudeville opposition acts.

This means that we should expect the US Federal Reserve to actively but perhaps indirectly facilitate the financing of these liabilities possibly through the banking system in exchange for the Fed’s buying of mortgages.

So the ECB and the FED will work to overcome political obstacles by resorting to legal loopholes. They who make the rules, break it.

The bottom line is that we will likely see intensification of central bank actions in 2012. Although I share the view that such conditions are unsustainable and represent as boom bust cycles, it is unclear that any unwinding will happen anytime soon.

As explained last week[23], interest rates will most likely determine the popping of this bubble where interest rates may be driven by any of the following dynamics, changes in: 1) inflation expectations 2) state of demand for credit relative to supply 3) perception of credit quality and or 4) of the scarcity/availability of capital.

And as interest rate levels remain benign, this should mean more upside for global equity markets including the Phisix perhaps until the end of the first quarter. It would be best to assess issues periodically and see how politicians respond to market developments.

The Permanence of Change Represents the Endgame

I might add that it is utter poppycock to talk about any grand finale or Mayan type Armageddon—usually heard from mainstream jeremiads—as outcomes for the current imbalances.

In reality, the ultimate outcome we should expect is the permanence of change.

For instance, the collision of the forces of decentralization with forces of the relics of the industrial era via 20^th century political institutions, legal framework and current top-down policies and mindset will likely intensify and may increase social tensions that may lead to some upheavals. Because of the many entrenched groups, profound changes will not be seamless. But eventually people will adapt.

As for inflationism, these have signified as boom bust CYCLES throughout the ages, with the worst consequence leading to death and the eventual birth, or if not, drastic reforms of the monetary system or through defaults. But again people learn to live or move on.

We must realize that in over 200 years, despite 2 major world wars and the grand but botched wretched experiments of communism, aside from pandemics[24] (e.g. Swine Flu) which resulted to massive losses of human lives and large swath of property destructions, world living standards has remarkably spiked[25].

Internal Market Conditions Supports The Phisix’s Breakaway Run

As I wrote in my last major article on the stock market for 2011[26]

Any sustained rally in the Phisix which may come during the yearend or during the first quarter of 2012 will likely translate to a broad market rally.

The 2012 rally has largely been supported by substantial advances in market internals.

The weekly averaged advance decline-spread has decisively swung to the side of the bulls.

Average daily trades have also sprung higher. This means more participation (possibly from neophytes) or more churning from existing participants or both. The spike in the trading activities exhibits snowballing confidence.

This is where the recent breakout seems amiss though, while average daily volume has improved this has not been as extensive as the intensity of the breakout would suggest.

Finally foreigners appear to be more bullish as net foreign buying averaged on a weekly basis has been on the upside.

As I used to point out, once foreigners become bullish their tendency is to push up major Phisix components or the heavyweights (largest market caps which are most liquid). The consequence is to amplify the gains of the Phisix.

Such bullishness may have filtered into the Philippine Peso, which almost in line with the Phisix was unchanged in 2011, but eked out .8% gain for this week. The Peso was at 44.11 last week compared to this week’s close at 43.75 per US dollar.

Given the strong move by the Phisix which seems to have significantly outraced our neighbors, there is a possibility that interim profit taking would be the order of the coming sessions. Yet even if profit taking mode occurs, the likelihood would be rotational activities—where previous winners may take a recess while the laggards gain the market’s attention—than a broad based decline.

However in a bullmarket, overbought conditions usually may extend.

Overall, since the market is likely to move higher overtime, the short term bias is likely to reflect on a positive sentiment despite interim volatilities.

And for as long as markets remain politicized and highly dependent on actions of policymakers, our task is to monitor their activities and assess and project the possible impacts from such actions on the markets.

---

^[1] See Global Equity Markets: Philippine Phisix Grabs Second Spot, January 14 2012

[2] See Can the Phisix rise Amidst the Euro Crisis? December 4, 2011

[3] Learntechnicaltrading.com Buying signals using trend lines

[4] Danske Bank FX Top Trades 2012 December 14, 2011

[5] Danske Bank Weekly Focus, January 13, 2012

[6] Reuters.com UPDATE 3-Yields fall sharply at Spanish, Italian debt sales, January 12, 2012

[7] Salerno Joseph T. Money and Gold in the 1920s and 1930s: An Austrian View, thefreemanonline.org

^[8] Gross William H. Towards the Paranormal, January 2012

^[9] See Greece Bailout: The Military Industry as Beneficiaries, January 12, 2012

^[10] See Japan’s Lost Decade Wasn’t Due To Deflation But Stagnation From Massive Interventionism, July 6, 2010

^[11] Reuters.com Mafia now "Italy's No.1 bank" as crisis bites: report, January 10, 2012

[12] Mauldin John The End of Europe? January 14, 2012 Goldseek.com

^[13] See Euro Debt Crisis: The Confidence Fairy Tale and Devaluation Delusion, November 28. 2011

[14] Rothbard Murray N. 1. Introduction: Government Revenues and Expenditures Man, Economy & State Mises.org

[15] Murphy Robert P. Correcting Quiggin on Austrian Business-Cycle Theory, Mises.org

[16] Mises Ludwig von 6. The Gross Market Rate of Interest as Affected by Inflation and Credit Expansion, XX. INTEREST, CREDIT EXPANSION, AND THE TRADE CYCLE, Human Action Mises.org

[17] Caplan Bryan Real Real GDP, Library of Economics and Liberty, January 14, 2012

[18] Wikipedia.org Lernaean Hydra

[19] Wikipedia.org Labours of Hercules

^[20] Bloomberg.com, Bernanke Doubles Down on Fed Mortgage Bet, January 11, 2012

^[21] Noland Doug, The Year Of The Central Bank Credit Bubble Bulletin January 13, 2012 Prudent Bear.com

^[22] See US Debt Ceiling Breached, President Obama to Seek Increase, January 12, 2012

^[23] See What To Expect in 2012, January 9, 2012

^[24] CNN.com Deadliest pandemics of the 20th century April 27, 2009

^[25] See BBC’s Hans Rosling: 200 Years of Remarkable Progress and a Converging World, December 3, 2010

^[26] See Phisix: Primed for an Upside Surprise, December 11, 2011

Explaining Popularity In Terms of Predictions: Dr. Nouriel Roubini’s Case

This seems like good news to me. My favourite mainstream Keynesian bear, Nouriel Roubini, appears to have ‘capitulated’. Mr. Roubini, a popular and very well connected economist, has almost always been on the wrong side of the prediction fence, and this seems to be just another of chapter of his string of failed forecasts and eventual turnaround.

Mr. Roubini has turned bullish on the US markets, reports the Bloomberg,

Nouriel Roubini, the economist who predicted the financial crisis, said U.S. stocks may gain in the next few months as company earnings remain resilient.

Adds Thomas Brown of bankstocks.com

What the heck happened to the L-shaped recovery? Roubini’s view is now squarely within the mainstream expectation. Good for him. The facts changed, and so he changed his opinion. Keynes would be pleased.

For me, Mr Roubini exemplifies as one of the bizarre ironies of the marketplace where despite his persistent wrong predictions, Mr. Roubini has remained quite popular with media.

If his strategy has been patterned to a tournament bridge game called “playing for a swing” as Professor Arnold Kling suggests, where “It would appear that Roubini's strategy is to make forecasts that differentiate himself from the consensus forecast. This allows him to be spectacularly right sometimes and spectacularly wrong sometimes. As long as he succeeds in getting everyone to remember the right forecasts more clearly than the wrong ones, he becomes a prophet”, then his success reflects on the public’s poor memory (or survivorship bias).

Google search trends for Mr. Roubini vis-a-vis Dr. Marc Faber

While there may be some truth to this, I am not convinced.

The public seems jaded to the forecasting accuracy by experts.

In relative performance, another (less) popular grizzly bear (but Austrian school leaning bear), Dr Marc Faber, who appears to have consistently been accurate even in predicting short to medium term trends—even the latest divergence between EM and developed economies stocks—has almost trailed Dr. Roubini’s in terms of popularity. (note the difference in search volume index—X axis).

So the explanation of “spectacularly” right or wrong doesn’t seem to suffice.

Instead, I think, Mr. Roubini signifies what the public wants to hear more than the validity of his theories. He personifies the confirmation of many entrenched but flawed beliefs.

Search volume for Austrian versus Keynesian Economics

One would note of an almost similar performance between Dr. Faber and Dr. Roubini’s popularity variance levels—Austrian economics has largely been subordinate in popularity to Keynesian economics during the past years (although this could be changing).

Finally there could be another factor: pessimism bias sells.

In the question and answer portion of this splendid talk on innovation, economist Deirdre McCloskey points out that Paul Ralph Elrich remains quite popular in spite of his ‘spectacularly’ wrong prediction.

Mr. Elrich is known for having lost the famous Simon-Elrich wager- wager that based on the price of 5 metals anchored upon the overblown risks of overpopulation.

Perhaps many are simply more attracted to a pessimistic outlook, whether valid or not, out of the penchant to see or resist a change in the status quo, or based on social signalling (to conform with the consensus outlook or to show intellectual prowess or promote an ideology, e.g. using fear to expand government control)

As Professor Bryan Caplan writes,

David Hume—economist, philosopher, and Adam Smith’s best friend—blamed popular pessimism on our psychology. “The humour of blaming the present, and admiring the past, is strongly rooted in human nature,” he wrote, “and has an influence even on persons endued with the profoundest judgment and most extensive learning.”

Bottom line: The popularity of economic or market forecasters appear grounded mostly on the confirmation bias or giving the public what they want or desire to hear more than the validity of theories or the batting average or the accuracy of predictions.

Uncertainty And Pessimism Bias

Popular blogger and lawyer Barry Ritholtz has a great piece on uncertainty at the Bloomberg.

Mr. Ritholtz writes, (bold highlights mine)

Wall Street has a sweet tooth for such investing maxims. They infect the trading community like influenza in December. Repeat mindless dictums ad nauseam, and they soon become the accepted wisdom.

The problem with these supposed truisms is they are no more accurate than the flip of a coin. A closer look at this uncertainty meme reveals it to be a false-ism -- one of those emotionally appealing phrases that ping around trading desks. The lack of evidence supporting their premise seems to matter very little.

To recognize how meaningless these statements are, consider the opposite: Could markets function without uncertainty? It takes only a little thought to realize that markets actually thrive on doubt, imperfect information and a lack of consensus.

Uncertainty drives the market’s price-discovery mechanism. Investing requires there to be differences of opinion. When there is broad agreement as to an asset’s fair value, trading volume falls. Without any uncertainty, who would take the opposite side of your trade?

History teaches that whenever the opposite occurs -- when certainty overwhelms uncertainty -- the herd tends to be wrong. In rare instances, when there is a near-total lack of uncertainty in the market, the outcome is usually a spectacular disaster.

Should the prospects of uncertainty prompt us to hide in our proverbial shells?

The answer is NO. What matters is the understanding of the risk-reward tradeoff.

Here is Mr. Ritholtz again,

When we discuss uncertainty, what we are really discussing is risk. All unknown outcomes contain risk, and therein lies the possibility of loss. Risk is inherent in the concept of uncertainty. However, anyone looking for performance must embrace risk, for without it, there can be no reward...

And what to do with people who always preach ‘uncertainty’?

Once more Mr. Ritholtz,

The future, by definition, is unknowable. Investing involves making our best guesses about the value of an asset at some point after this moment in time. There will always be an element of uncertainty involved. We can discount various outcomes, engage in probabilistic analysis, but no one knows for certain what tomorrow will bring.

Those who claim to know fail to understand the most basic workings of markets. We need only consider the track record of Wall Street’s prognosticators to know the truth in this statement. As much as the future is uncertain, the most likely outcomes are well understood.

Exactly. Many who preach doom and gloom hardly managed to predict the markets accurately, yet they stubbornly insist that the world is headed for the gutters.

Uncertainty is NOT a valid reason to be maintain a bias on pessimism. A bias that largely emanates from:

-resistance to accepting critical changes, e.g. industrial age to information age

-undue fixation on several variables as harbinger for gloom or to quote Professor Bryan Caplan,

a tendency to overestimate the severity of economic problems and underestimate the (recent) past, present, and future performance of the economy.

-and finally, a bias which is predisposed at the attainment of a desired political and or economic outcome.

Again the brilliant Professor Caplan,

a general-interest prop to political demagoguery of all kinds. It creates a presumption that matters, left uncontrolled, are spiraling to destruction, and that something has to be done, no matter how costly or ultimately counterproductive to wealth or freedom. This mind-set plays a role in almost every modern political controversy, from downsizing to immigration to global warming.

Like Mr. Ritholtz, the implications of misunderstanding uncertainty imbued as a bias often leads to misdiagnosis of the risk-reward tradeoffs that leads to wrong conclusions and subsequently a poor or dismal track record in investment decisions.

Bad Record Of Doom Mongering And Interest Group Politics

Here is Matt Ridley on the dismal track record of doom mongerers (or the pessimism bias). [hat tip Mark Perry] (all bold emphasis mine)

``By then I had begun to notice that this terrible future was not all that bad. In fact every single one of the dooms I had been threatened with had proved either false or exaggerated. The population explosion was slowing down, famine had largely been conquered (except in war-torn tyrannies), India was exporting food, cancer rates were falling not rising (adjusted for age), the Sahel was greening, the climate was warming, oil was abundant, air pollution was falling fast, nuclear disarmament was proceeding apace, forests were thriving, sperm counts had not fallen. And above all, prosperity and freedom were advancing at the expense of poverty and tyranny.

``I began to pay attention and a few years ago I started to research a book on the subject. I was astounded by what I discovered. Global per capita income, corrected for inflation, had trebled in my lifetime, life expectancy had increased by one third, child mortality had fallen by two-thirds, the population growth rate had halved. More people had got out of poverty than in all of human history before. When I was born, 36% of Americans had air conditioning. Today 79% of Americans below the poverty line had air conditioning. The emissions of pollutants from a car were down by 98%. The time you had to work on the average wage to buy an hour of artificial light to read by was down from 8 seconds to half a second.”

The incentives for doom mongering? Apparently “interest Group politics”

Back to Mr. Ridley…

``I now see at firsthand how I avoided hearing any good news when I was young. Where are the pressure groups that have an interest in telling the good news? They do not exist. By contrast, the behemoths of bad news, such as Greenpeace, Friends of the Earth and WWF, spend hundreds of millions of dollars a year and doom is their best fund-raiser. Where is the news media's interest in checking out how pessimists' predictions panned out before? There is none. By my count, Lester Brown has now predicted a turning point in the rise of agricultural yields six times since 1974, and been wrong each time. Paul Ehrlich has been predicting mass starvation and mass cancer for 40 years. He still predicts that `the world is coming to a turning point'.

``Ah, that phrase again. I call it turning-point-itis. It's rarely far from the lips of the prophets of doom. They are convinced that they stand on the hinge of history, the inflexion point where the roller coaster starts to go downhill. But then I began looking back to see what pessimists said in the past and found the phrase, or an equivalent, being used by in every generation. The cause of their pessimism varied - it was often tinged with eugenics in the early twentieth century, for example - but the certainty that their own generation stood upon the fulcrum of the human story was the same.

``I got back to 1830 and still the sentiment was being used. In fact, the poet and historian Thomas Macaulay was already sick of it then: `We cannot absolutely prove that those are in error who tell us that society has reached a turning point, that we have seen our best days. But so said all before us, and with just as much apparent reason.' He continued: `On what principle is it that, when we see nothing but improvement behind us, we are to expect nothing but deterioration before us.'

Let us back this up with some graphs (source google public data)

Ballooning global merchandise trade soaring global GDP per capita

Lengthening of world's life expectancy

Explosion in Mobile Phone Usage

Bottom line: Beware of the false 'politically tainted' messiahs.

Why Are Intellectuals Pessimistic?

Author Matt Ridley in an interview says,

"my answer is that pessimism gets attention – from funders, from the media, from governments. Also, for reasons I do not fully understand, it sounds wiser than optimism." (emphasis added)

I'd add that aside from personal interests in terms of attention and reputation, political agenda can always be a major motivating factor for advancing pessimistic agenda by the intellectuals.

Fear, brought about by intense pessimism, are often justification for interventionism or inflationism. As 2nd US President John Adams once said "Fear is the foundation of most governments; but it is so sordid and brutal a passion, and renders men in whose breasts it predominates so stupid and miserable..."

Matt Ridley has great insights in the interview (on technology and the environment). And here is an example where pessimism could be used as a political tool...

Again Mr. Ridley, ``Many times in history, promising bursts of openness, trade, innovation and growth have been snuffed out by the erection of barriers to the free flow of things and thoughts. It happened to Phoenician Tyre, classical Greece, Mauryan India, Ming China, Abbasid Arabia, imperial Rome, golden-age Holland. It happened to America in the 1930s, to Latin America and India after the second world war, to China after the communist take-over. Protectionism, tariffs, piracy, war, or imperial plunder – they all have the same impoverishing effect if they interrupt trade. Liberalization, by contrast, dramatically raised the standard of living of Hong Kong, China after 1980, India after 1990, South Korea versus North Korea and so on. And there are always short-term incentives pushing people to recommend protectionist or plundering measures." (emphasis added)

Yet most of the current interventionist policies are rooted on such pessimism (which ironically have been caused by the same set of prior actions).