Forecasting Consumer Guide Part III: Historical Comparisons
There is a forecasting feast in USA Today, offering us a nice summary of the most important viewpoints.
Several of the comments deserve review, but let’s start with that of Tom Au. Tom is obviously a really smart guy, well-educated, and with great experience at Value Line in identifying value investments. He is the author of a highly regarded book on value investing.
Tom’s view is that this decade is like the 70’s:
The economy is very much like it was in the ’70s. The stock market was also in a funk in the 70’s gaining a meager 17.2% in the decade.
He cites the Iraq war, the spike in energy prices, and the fall in President Bush’s approval ratings as similarities to Vietnam, the Arab oil Boycott, and the Nixon impeachment and resignation. Sometimes his comments also thrown in corporate malfeasance and trials as akin to the Nixon situation.
Tom Au is not alone in invoking the "stagflation term" to describe what they think might happen in this decade.
Since Tom is an honors graduate of Yale, I am amazed at the cavalier and superficial nature of this comparison. In particular, consder his points:
- Iraq is not Vietnam — and we all hope it never will be. Let me be clear that I do not disparage the commitment of those who served and sacrificed in Iraq, including the children of good friends and neighbors and my nephew. Having said this, the losses are different by the order of 50-1; there was a draft; there was a widespread protest movement that disrupted much activity and which led to armed conflict and death; and I am just getting started. Vietnam split the country in a way different from any war before or since.
- The energy spike is totally different. It was much higher in real terms in the 70’s and it was sparked by OPEC’s intention to punish countries supporting Israel. Energy was also a larger component in overall spending. The current situation is different on all counts.
- Anyone comparing the current administration’s dip in the polls, even with the recent use of the "Impeachment" word, needs to do a real study of the effect of the Watergate hearings and Nixon’s resignation. Maybe young people just do not realize how vulnerable everyone felt when the Commander-in-Chief was virtually powerless in the middle of the Cold War. For a time, there was no Vice-President, since Agnew had also resigned. We were paralyzed for months during the Watergate hearings and the activities of the special prosecutor. It took a couple of healing years with Gerald Ford filling in for political stability to be regained. This is nothing like Bush’s poll ratings, or Ken Lay, or anything like what we are seeing now. It is not close.
Moving beyond the very superficial comparisons Tom makes, he should take a look at econonic growth, inflation, and interest rates during that era. He is speculating (against the prevailing economic consensus) that these factors will destroy a currently strong economy. That was not the case in the 70’s.
It is a very big prediction. I would be much more interested in Tom’s viewpoint if he were to write a "compare and contrast" piece on the two eras. It should be something significant and reflective, displaying the same level of scholarship that he shows in his book.
Conclusion: Consumers of forecasts should be wary of facile historical comparisons. Look for some depth of analysis and intellectual rigor.