Back to the Future, Part 1: Prediction Fatigue

By: John Rubino | Thu, Aug 15, 2013
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It's around 10:00 on a Friday night in early 2005. I'm shooting pool in a local bar with Hunter, a math professor at the local university who had just come into a big inheritance and was tossing it around like the found money that it was. He had recently paid cash for a house and taken his new girlfriend to Vietnam, and had (to get to the point of this post), after a few long talks with me, concluded that the housing bubble was about to burst and the banks and home builders were once-in-a-lifetime short candidates. He'd committed a fair chunk of change to put options on those companies in eager anticipation of their collapse.

But not only had the collapse not come but those stocks had risen, sending his options bets into freefall. On this night, he'd had enough. "Listen," he said, "I can't think about this anymore. Maybe it'll happen, maybe it won't but we've said everything there is to say, so let's find something else to talk about." We shifted focus to the game at hand, which also had money riding on it, and didn't talk stocks for the rest of the night. Very discouraging. A friend had placed a big bet on my recommendation, had lost money and was pissed.

We didn't know it at the time, but Hunter and I were experiencing something common among those who like to bet against bubbles: prediction fatigue, that (sometimes very long) stretch of purgatory that starts when you become certain that things are out of control and a crash is imminent - and runs until the crash actually takes place. Junk bonds, for instance, were clearly a bubble in 1988 but didn't implode until late 1989. Tech stocks were classic short candidates in 1998 but doubled one more time before tanking in 2000. Housing stocks were garbage (along with most of the mortgages then being written) by 2004, but then they did this:

PHLX Housing Sector Chart 2005-2009

It was March 2006 before they started to roll over, and even then they staged a serious relief rally before entering their death spiral in 2007. By that time Hunter had closed out his options, I had been forced by my brokerage house to sign a waver stating that I remained short the banks over their strenuous objections, and millions of other people who had correctly diagnosed the housing bubble but bet against it too soon had lost their shirts. (I hung in and ended up doing pretty well, though not nearly as well as if I'd waited two more years to short everything in sight.)

Now here we are again. An insane round of global debt monetization has inflated another series of bubbles. Stocks are generally as high as they were in 2006. Treasury bonds, despite a recent correction, are as overvalued as tech stocks in the late 90s. Junk bonds are rocking. Even housing is coming back. The sound-money community understands all this, realizes that the new bubble will burst just like its predecessors - and is sick of hearing about it.

A DollarCollapse a reader illustrated this frustration with the following:

For how many decades have we been hearing about threats to Israel, Iran's imminent nuclear capabilities, instabilities in the Middle East threatening a third world war, local skirmishes getting out of hand, and oil supplies being cut off? The 2009 "suckers" stock market rally, the demise of the EU and the euro, China this, China that, Japan is going to crash, Fukashima may be a world-wide disaster, the US dollar is going to crash, interest rates are sure to rise, gold and silver are going ballistic, gold and silver are in bubbles, gold and silver may crash, debt is the problem, debt is not the problem, debt doesn't matter, when the Fed stops QE things are going to crash, the Fed will never stop QE, if the Fed doesn't stop QE things are going to crash, corporate profits are rising, corporate profits are falling, stocks are overpriced, stocks are under priced, the US is becoming fascist, the US is experiencing an entrepreneurial renaissance, there is an energy and manufacturing boom in the US, there is no recovery in the US, everybody wants to come to America, America is in decline, unemployment is falling, real unemployment is rising, the Fed won't let the markets go down much, the Fed can't keep the markets up indefinitely, central banks are buying gold, central banks are selling gold, there is a shortage of gold, there is no shortage of gold, the gold price is manipulated, the gold price is not manipulated, interest rates are rising, interest rates are falling, inflation is low, inflation is higher than it seems, inflation is really not as high as it seems, Europe is starting to grow again, Europe is stagnating, Europe is getting worse, the developed Western economies are in decline and the East is growing, North America is experiencing a revival, the developing economies are declining, the US stock market is the place to be, anyone still in stocks is going to regret it, bonds are in a bubble, bonds are still the safe haven, junk bonds are safe because of all the corporate cash, junk bonds are signaling trouble, mining stocks are the most undervalued of all, mining stocks are poised to go higher, mining stocks still have further to fall, mining stocks will fall if the overall market falls, mining stocks are a hedge against a market crash, the demand for oil is growing, the demand for oil is falling, the demand for oil is flat, fracking will make the US a net energy exporter, fracking will fail to live up to its hype, consumer consumption is rising, consumer consumption is falling, wages are rising, wages are falling, the glass is half full, the glass is half empty.

Yep. The stream of "this is it!" prognostication from every corner of the financial market (some of it coming from this site and most of it sounding very reasonable at the time) has been going on far too long, and everybody's sick of it. But that it always seems to go this way implies that prediction exhaustion is a necessary stage in the process, akin to "capitulation" prior to a market bottom. Just when you can't stand it anymore and are ready to wash your hands of the whole project, cash out, and get on with life, things suddenly go your way.

Oh, did I just make another prediction?



John Rubino

Author: John Rubino

John Rubino

John Rubino

John Rubino edits and has authored or co-authored five books, including The Money Bubble: What To Do Before It Pops, Clean Money: Picking Winners in the Green Tech Boom, The Collapse of the Dollar and How to Profit From It, and How to Profit from the Coming Real Estate Bust. After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for CFA Magazine.

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