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Cracked crystal balls abound

Predictions have a funny way of turning out spectacularly wrong

Over spring break, I read a fascinating book called History’s Worst Predictions And The People Who Made Them, by Eric Chaline.

It covers predictions since Roman times from topics including war, financial markets, technology, economics as well as end of the world or doomsday scenarios.

What made it so interesting was not that these predictions were so wrong, since it is too easy to see the “obvious” in hindsight. Rather, it shows just how difficult predictions can be. Perhaps it’s not even worthwhile making predictions and guessing the future since as physicist Niels Bohr said: “Prediction is very difficult, especially if it’s about the future.” So, here are a few economic, social, financial and technological predictions that have gone the way of the DVD.

First of all, we all remember the warnings surrounding the end of the electronic world that would happen as we entered the new millennium, also know as Y2K: “At midnight on January 1, 2000, most of the world’s mainframe and desktop computers will shut down and crash.” This is attributed to Gary North in his book The Year 2000 Problem: The Year the Earth Stands Still. I remember many, many others saying the same thing as we rolled out of 1999 and in to 2000.

But technological uncertainty is not just a modern-day phenomenon. History is replete with examples of misunderstood technology. Lord Kelvin in 1897 believed that “radio has no future.” Nor apparently did the telephone when U.S. President Rutherford B. Hayes said: “It’s a great invention but who would want to use it anyway?” after seeing a demonstration of the telephone in 1876.

Likewise for the television when a Hollywood studio executive in 1946 predicted that television would not last: “Television won’t be able to hold on to any market it captures after the first six months. People will soon get tired of staring at a plywood box every night.” And of course, “there is no reason anyone would want a computer in their home” either, according to Ken Olsen, president of Digital Equipment Corp., when in 1997 he suggested the personal computer would never catch on.

Inventions in general have confounded humanity yet have gone on to change society forever like when the president of the Michigan Savings Bank said to Henry Ford in 1903, “The horse is here to stay, but the automobile is only a novelty – a fad.” At the same time, “airplanes are interesting toys but of no military value,” according to the French military strategist Marshall Ferdinand Foch in 1910. Of course there was the ever-famous captain of the unsinkable Titanic who said in 1912: “I cannot imagine any condition which would cause a ship to founder. I cannot conceive of any vital disaster happening to this vessel. Modern shipbuilding has gone beyond that.”

Other areas very susceptible to predictions gone wrong are the financial and economic markets. “The collapse of capitalism and the victory of communism” was predicted by Karl Marx in 1848 when it was actually the collapse of communism and the victory of capitalism that materialized. Interestingly enough, on October 17, 1929, the famous economist Irving Fisher said the asset bubble of the 1920s would never bust, just days before stock prices collapsed on the New York Stock Exchange.

This errant belief that we’ve progressed beyond economic and financial cycles was repeated again more recently when Gordon Brown Chancellor Exchequer of England said, “We will not return to the old boom and bust,” in his budget speech to the House of Commons in 2007. This was the year before the 2008 financial crisis and credit crunch. Keep in mind, it was also Brown who sold 60 per cent of Britain’s gold reserves between 1999 and 2002 at around US$275/ounce for a total of about US$3.5 billion. That was the bottom of gold prices before it went on a 10-year bull run ultimately reaching US$1,900/ounce. By 2011, that quantity of gold would have been worth over $19 billion.

Then there’s the Peak Oil Theory from M. King Hubbert in 1956 whereby crude oil production would peak in the mid-1990s and enter into an irreversible decline with serious consequences for the future of industrial civilization. In reality, there’s lots of oil out there waiting to be drilled; at $200 or $300/barrel, we’ll all be drilling in our backyards.

Finally a recurring issue that is both politically and socially charged is Earth’s temperature. Recall that not long ago a global cooling and coming of a new ice age was upon us, as featured in Time and Newsweek magazines in 1975. Now we are all faced with global warming. Let’s just call it global climate change and accept that Earth’s temperature will fluctuate for various reasons, like it has since the beginning of time.

(The side lesson here is that if a topic ever reaches the front page of a popular magazine, or gains far too much online social media attention, it may very well be the top of the market and you can expect that trend to reverse from there.)

Bottom line, the overall lesson here is that predicting the future is difficult. While there is nothing wrong with financial forecasts or market outlooks, be careful of right or wrong statements and all or nothing thinking. Avoid words like certainly or always and never say never. Market prices can and will move to extreme highs or lows and stay there longer than you think so you’re not going to be right all the time.

Another take-away from these predictions is that when circumstances and information change, your analysis and decisions must change as well. Don’t get set in your ways or wait too long for prices to come back and be prepared to change.

I believe people spend a disproportionate amount of time trying to predict prices. I would rather invest my time and effort implementing strategies to proactively manage risk, protect revenues and capture price opportunities. As Abraham Lincoln said, “The best way to predict your future is to create it.” This is where hedging programs and marketing strategies earn their money.

About the author

Columnist

David Derwin is a commodity portfolio manager with PI Financial Corp. The views here are his own, presented for educational purposes, rather than as specific market advice. For a copy of the complete research study “Farming Big Data — Myths, Misperceptions & Opportunities in Agriculture Commodity Hedging” contact him at [email protected]

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