Leithner Letter for the month ended July 31, 2017; titled, “Experts Can’t Predict – Yet Investors Must Plan.”

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Though it is not yet clear just how the long expansion might end, there are three likely possibilities. First, it might run out of steam as demand fizzles. Second, the Asian depression might overwhelm earnings prospects, stock market values and hence household confidence. Finally, Federal Reserve Chairman Alan Greenspan might, in time-honored fashion, murder the expansion before it gets a chance to die of old age. But each of these possibilities is remote. The U.S. economy likely will not see a recession for years to come. We don’t want one, we don't need one, and, as we have the tools to keep the current expansion going, we won't have one. This expansion will run forever.

Rudi Dornbusch

“Growth Forever” (The Wall Street Journal, 30 July 1998)

The stability of the economy is greater than it has ever been in our history. We really are in remarkable shape. It’s amazing that people … write stories about how bad the economy is … The U.S. is at the peak of its performance … there’s never been a time when we’ve had a state of prosperity … a level or spread, [like] we’ve had in the past ten or fifteen years. And I think that Alan Greenspan’s monetary policy is primarily responsible for it.

Milton Friedman

Interview with Charlie Rose (2005)

I think the [financial] system is much safer and much sounder [than it was a decade ago]. We are doing a lot more to try to look for financial stability risks that may not be immediately apparent but to look in corners of the financial system that are not subject to regulation, outside those areas in order to try to detect threats to financial stability that may be emerging. … Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.

Janet Yellen

Banks “Very Much Stronger;” Another Financial Crisis not Likely “in Our Lifetime” (CNBC, 27 June 2017)

Experts Can't Predict - Yet Investors Must Plan

It’s unwise to allow experts’ predictions to determine one’s investment decisions. Authorities generally don’t provide reliable guides to the future: indeed, the more confident is the expert, the less accurate, on average, will be his prediction – and therefore the poorer will be any resultant decision.1 Yet investment reflects particular (albeit perhaps tacit) assumptions about the future; so does choosing a career, resolving to marry, starting a family, buying a house, retiring, etc. More than mere guesses or wishful thinking must justify such actions.

What, then, to do? Investment is a process that generates decisions; accordingly, as part of this procedure investors must understand that

1. the predictions of experts – including the world’s foremost economists’ assessments about the business cycle, rates of interest, etc., are typically less reliable than random guesses or tosses of a coin;

2. how we think about the future in general (rather than what we think about specific aspects of it) can provide justifiable means to navigate through its fog of risk and uncertainty.

A Short History of Predictions of the Price of Oil

The logic is valid and the evidence is unambiguous: no matter what we consider expertise and regardless of their area of speciality, experts can’t dependably predict the future. Indeed, their record is typically so abysmal that, when it comes to the future, it’s tempting to regard “experts” as “anti-authorities.” Clearly, it’s essential to assess their predictions very sceptically; historical perspective and a wry sense of humour are also vital. U.S. President Jimmy Carter’s Address to the Nation on 18 April 1977 – known as his “moral equivalent of war” speech – provides an excellent example (see also James Reston, Moral Equivalent of War, The New York Times, 20 April 1977). “Tonight,” Carter told his countrymen,

I want to have an unpleasant talk … about a problem unprecedented in history. With the exception of preventing war, this is the greatest challenge our country will face during our lifetimes. The energy crisis has not yet overwhelmed us, but it will if we do not act quickly.

Carter was hardly the first politician who resorted to hyperbole. Apart from war-time, however, he was among the first (and, I boldly predict, won’t be the last!) to use passages like “this is the greatest challenge our country will face during our lifetimes.” He was perhaps the only American president who began a speech by telling his audience that it would be “unpleasant.” And it was: that night he asserted that the U.S. – indeed, civilisation itself – was in peril. The next several years, he declared, would be hard. They would demand sacrifice and struggle – because, he alleged, “the oil and gas we rely on for 75% of our energy are running out.” Moreover, “unless profound changes are made to lower oil consumption, [my expert advisers and I] now believe that in the early 1980s the world will be demanding more oil than it can produce.” Because demand would undoubtedly continue to outstrip supply, the price would soar. Indeed, Carter – backed by a consensus of experts – was certain that it would “never” fall.

That was the benign scenario. Actually, he reckoned, things would probably be worse: if the world’s consumption of oil continued to rise “by 5% a year, as it has in the past, we could use up all the proven reserves of oil in the entire world by the end of the next decade.” The president warned that “nothing short of nuclear war” could damage the U.S. more grievously. Cheap oil had fuelled its – indeed, the Western world’s – great boom of the 1950s and 1960s; and the resulting era of mass prosperity made Americans the envy of much of the world. Inexpensive petroleum enabled the development of vast tracts of suburban housing, the national motorway system – and ordinary people’s ability to buy an affordable car and drive wherever their desire took them. Low-cost oil was the very lifeblood of the American way of life.

The OPEC oil embargo of 1973 – which inflicted petrol shortages and triggered a deep recession – underscored its vital importance. Yet most Americans believed that the end of the embargo meant that abundant supplies and good times would soon return. Carter sought to dispel this fond wish:

I know that some of you may doubt that we face real energy shortages. The 1973 [queues] are gone, and our homes are warm again. But our energy problem is worse tonight than it was in 1973 or a few weeks ago in the dead of winter … and it will get worse every day until we act.

Carter used “energy alarmism” as a rhetorical prod with which to badger Americans until they amended their behaviour to suit his ideals. Consumption, he insisted, must henceforth cease to be the foundation of the U.S.

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