A very difficult area of scientific prediction is that of fluid dynamics. Or, the science of predicting how a fluid (which could be liquid or a gas) will react to various forces. An example is the weather and weather prediction. There are a myriad of things that affect how the weather will be, what direction the wind will blow, how hard it will blow, how much moisture will be in the air, and if that amount of moisture will lead to precipitation and how much precipitation. It’s so difficult because of how many variables there are. A weather forecast then can be thought of as a likelihood or probability.
Predicting the market is a similar thing and market forecasters are similarly making a best effort guess based on a myriad of data and then guessing how investors will react to that data. After all, the stock market is really just a big voting machine in the short run. I have a general rule of thumb that I don’t prognosticate the capital markets, but let me talk about two schools of thought for the next decade.
The first school of thought is a view of history as seasons of time. This view of history dates back at least to Greek philosophy and in the 1990s was popularized by historians William Strauss and Neil Howe. This view looks at history roughly in 20 year cycles analogous to seasons:
Winter – This is a time of history where a society is in crisis. This is a time when the culture advanced toward more civic engagement, improving ethics, a growing sense of virtue and doing what’s right because it’s right. It is an era of coming together and equality. For America this would be the 20 years from 1929-1946 when we saw the Great Depression and WWII. It’s broadly assumed that we are currently in a winter, but more on that in a minute.
Spring – This is a post-crisis era when institutions are strong and individuality is less. People generally feel good and loyal about institutions. For America this would have been roughly from 1946-1963 when Kennedy was assassinated. The ideology of the 1950s are emblematic of this.
Summer – This era is often thought of as a cultural awakening when institutions are attacked and autonomy rises and people become more individualistic. In a sense people rebel against the social norms which are rejected as shallow and unspiritual. This era was from 1963-1984 spanning Civil Rights, the various cultural revolutions of the 60s, Vietnam, and Watergate. It’s characterized by self-expression and self-assertion.
Fall – This is an era of unraveling when institutions are broadly distrusted. The Reagan era is very much emblematic of this as he campaigned on the idea that government is the problem and not the solution (the 1980 campaign) and then that it was morning in America (the 1984 campaign). The culture expresses detachment and a lessened loyalty from institutions and the individualism is the value of the day (the opposition of “Spring”). To me, the simultaneous (and financially suicidal) demands for low taxes along with full entitlement programs is very representative of this mood. For America this was 1984-TBA.
It’s difficult to peg eras when you’re in them, but by all accounts, those who see history this way believe that we’re in a “Winter”. Some would say that this era of Crisis started at the peak of the dot coms in March of 2000 or perhaps on 9/11. Others would argue that it started more recently with the 2008 Financial Crisis. Either way, the dating would suggest that we’d be in “Winter” through the rest of this decade and perhaps halfway through the 2020s.
I think that the current Zeitgeist feels very winterish. The youth seem far more aware of politics than when I was a teenager and I don’t think it’s just because an access to information. Washington has been increasingly polarized over the past few decades culminating in unprecedented standoffs of power in recent years.
When this comes to market prognostication; this view would suggest that the economic and stock market growth in the next decade will be bound by the cultural malaise. They may argue that the unspectacular American economic recovery is indicative of that. The era can be thought of as the culture waiting to be unified to usher in the “Spring”. Or, the lack of unity pushes the society to intensify and worsen the crisis of “Winter” like it did for the American Civil War.
The good news would be that this era eventually ends and ushers in a societal “Spring” when people come together for the common good and the economy prospers.
The other school of thought can be called “Reversion to the Mean”. They would look at humanity’s progress less as a cycle, but more as a permanent upward charge. They would see that if this permanent uptrend is interrupted, it always temporary and like a rubber band pulling back and building up tension it is only a matter of time before it snaps back aggressively to “catch up”. Or to put it another way, it is a reversion to the mean. The economy grows at a relatively set pace and if it hasn’t grown at that pace, it naturally plays catch up when aggressive growth comes into the picture.
I personally don’t see these views as radically different nor irreconcilable. Historically speaking, the “Reversion to the Mean” has always happened. If you go back in time as long as we have data, the economy has resumed its permanent upward trend. And before the usual suspects among us start chanting, “Japan, Japan!”, history has taught us that pessimistic prognosticators are always eventually right … but only temporarily.
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