In a a recent article titled Companies Prepare for Future that Can't Be Predicted, subtitled 'A Generation of Uncertainty' discusses the question of economic uncertainty on a number of levels. Relying primarily on interviews with senior German CEO's, the authors suggest that:

• heads of major German companies admit they have no idea of what the future holds from an economic point of view;

• very importantly, 'it is no longer possible to approve a corporate five-year plan in the belief the company will actually achieve that forecast'. This is significant in the contexts of company valuation and securities analyst reports and recommendations;

• the 'age of predictability is over, and it has never been more difficult than today to give a precise prediction of future economic development';

• at a time of extremes, predictions have become impossible, and "I don't know what will happen in 2013" (from the CEO of BMW);

• 'banks and insurance companies along with consumers and depositors now only have one certainty: There are no certainties anymore'; and,

• "while the worldwide network of financial markets and the Internet boosts growth during an economic boom, it also exacerbates downward trends during a crisis".

To the extent world and country specific economic uncertainty today is greater than it was at least perceived to be pre-2008, that means:

• financial market risk simply has to be higher today than it has been in more stable economic times;

• company valuation opinions (also read 'analyst opinions') have to be even more subjective today that they were in more stable economic times. Company valuations are best determined based on analysis of forecasted free after-tax cash flows. If indeed it is no longer possible to approve corporate five-year forecasts - typically one of the primary underpinnings in any credible company valuation opinion - then broadly speaking valuation opinions generally become so subjective that they ought to be given far less weight than they fairly can be given in more predictable economic times;

• the foregoing needs to be conditioned by the observation that not all companies and their businesses are created equal, and it may be that five-year forecasts can be credibly determined for some companies. Regional service businesses that are not globally impacted by low-wage rate manufacturing might be an example, particularly where the services offered are directly impacted by predicable levels of functional obsolescence - electrical service contracts in a developed country being but one example. Even then, such businesses are not 'isolated islands' but are themselves affected by broad economic conditions. Hence, valuations of those companies likewise are underpinned by more subjectivity in the current economic environment than they are in more stable economic times;

• in the current 'the only economic certainty today is that there are no economic certainties today" climate we live in, the financial markets and those that participate in them have to be at greater risk than those markets and those participants are in more stable and predictable times. I am reminded of the old saying: 'The least common thing about common sense is that it's common'. In other words, think hard for yourself on what is said here; and,

• current economic uncertainty also means that you don't have to be a financial markets participant to be at enhanced financial risk - you simply have to be 'on the right side of the grass'.

Interestingly, the authors of the referenced article take a serious 'shot at the bows' of economic analysts, who they say:

• "continue to make forecasts as if there is a mathematical formula to calculate the future"; and,

• "don't allow themselves to be bothered by the fact that their previous predictions were frequently off the mark".

If you read this Newsletter regularly, you will know I continue to believe that most 'technically trained economists' seem to believe they can use historic economic data to predict what will happen economically going forward. This, in what I think to be to borrow a phrase 'a brave new world', where I don't believe such an approach currently makes sense.

Companies Prepare for Future that Can't Be Predicted is one article I recommend you take the time to read and think about.

Topical Reference: Companies Prepare for Future that Can't Be Predicted, from Spiegel Online, Dietmar Hawranek, Martin Hesse and Alexander Jung, December 31, 2012 - reading time 4 minutes