How Long do we Have to Wait Before Wrong is Wrong?

A good economist will always give you a prediction or a timeframe, but never both.   This applies to a great deal of people outside of economists and market pundits and I think it also has to do with the fact that asset managers generally garner more respect regarding predictions than economists do.  You see, a money manager HAS to give you both.  There is no hedging in the commentary from an asset manager because they’re backing up predictions with an investment portfolio.  Portfolio managers are in the business of making predictions AND offering timeframes.

But economists and market pundits have the luxury of offering you a prediction and then essentially saying “it will happen, just you wait….and by the time it hasn’t happened you’ll have forgotten I ever made the prediction”.  It’s a glorious business, the business of making predictions in the world of economics.  That’s why I generally don’t trust or put much credence in the predictions made by most mainstream economists.  In fact, I’d say that most economists don’t even make predictions.  They just make really loosely described macro comments and then cherry pick the ones they want at a later date.

Anyhow, I was having a discussion Twitter with some smart people about the Kyle Bass trade on Japan.  As you may or may not know Bass has been betting on higher rates in Japan based on a debt crisis like that in Greece.  According to Business Insider it’s turned into a total disaster because Bass predicted that Japan would default like Greece.  He made this very vocal prediction about 2 years ago.  I came out at the same time and stated the opposite.  I said Japan would not default because their monetary system was totally different from Greece’s.  In essence, Japan has the same institutional structure as the USA so solvency or “running out of money” is never an issue.   The USA is an operational currency issuer while Greece is an operational currency user.   Granted, we hadn’t even created Monetary Realism back then so the precise details on this thesis were not complete, but I understood that Japan wasn’t going to “run out of money” unless they chose too.  Some of the people I was discussing this with said Bass was early, not wrong.  They might be right.  But as a money manager, Bass can’t leave this trade on forever like a market pundit can.

But still, I have to wonder – how much longer do we have to hear about surging interest rates, bond vigilantes, hyperinflation, imminent USA default and all of the other terrible predictions made by various market pundits over the years before people start to just flatly reject the framework from which they work?  Or do we just live in a world where anyone can say anything and no one is held accountable for being totally wrong?  What do the readers think?  Is it too early to proclaim all these predictions wrongs?  Or can we finally start to question the theoretical framework that is the basis of these ideas?


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. For a portfolio manager time runs out fast. For an economist or pundits time stands still.

  2. Credit where credit is due: The MMT/MMR guys had this one WAY right over the hard money guys.

    Massive deficits and low rates are NOT NOT NOT mutually exclusive. They can live well and good side by side in perfect harmony for decades.

  3. Cullen,

    I suspect it may have to do with what we ourselves think about what our “expertise” is. For example, when my wife and I discuss something where I have no expertise (or where I am happy to concede that I am not an expert) then I can usually admit that a past statement I made was wrong. Importantly I dont feel anything.

    But if the statement pertains to an area where I believe I hold some expertise, then I think we tend to defend our position. So if my wife challenges me on our investment portfolio, my defence is usually stronger because I feel I have expertise and therefore I am “qualified” to make a statement. Admitting I am wrong somehow makes me feel foolish or as if I now lack credibility.

    This is the problem with predictions. The fact is that no-one is any better than anyone else, expert or not about making statements like Bass has regarding Japan. He could be right. At one stage I argued the same position. But after reading and thinking about MMT/MR I understood that I was wrong and changed my position. When people questioned how did I change, I took the moral high ground with the Keynes Statement about when the facts change, I change my mind, what do you do sir?….But the reality is that it would appear that MR’s arguments are more logical than Bass’s. Even looking at history, it would be a stretch to continue the Bass argument.

    I think very few of these experts put their money where their money is. And in their more introspective moment may admit that they are no better at predicting the future.

    The only one I have seen (so far) that is any good is Buffett. But he also allows himself along lead time and makes fairly general statements (usually with a high degree of probability) such as “The US will be better in 5 years time”. He is also willing to place large bets on that which given his record is quite successful.

    Two great books to consider:

    Being Wrong – Karthyn Schultz

    Future Babble – Dan Gardner.


  4. Good thoughts there. Thanks. You did a very powerful and difficult thing there. You not only admitted that you might be wrong, but you were honestly curious enough to overcome your personal biases to challenge your own thinking and consider why you were wrong. I’ve done a lot of this over the years and I think the result is that I am better at solving puzzles because I have learned how to be wrong. As I say at times, it’s in learning to be wrong that we learn to be right. As a money manager I learned to adapt and evolve to this form of thinking very quickly. If you don’t evolve and learn from mistakes in the money management business you go out of business mighty quick. Economists and most other people don’t have their feet held to the fire like this. And most other people are too biased to say to themselves “hey I might be wrong” or better yet “can I be open minded enough to consider positions that make me feel really comfortable?”

    Thanks for the books. I didn’t know Schultz wrote one, but I had talked about her work before. You might enjoy this piece.

  5. The next crisis will shake the US on its foundations. AGAIN. And then the crisis will spread to China & Japan (next year ??). But the idea that a central bank can “print” all the money it wants in order to prevent the next crisis is ridiculous. Yes, it can print but it will only postpone the inevitable and make things worse in the long run.

    The problem with this MR notion is that “printing money” creates more CREDIT/DEBT, allows a government to increase its debtload. And too much debt is precisely the problem. The world is already awash in debt.

    Don’t worry, the FED WILL “print” A LOT OF money in the coming weeks/months in order to absorb all the T-bonds that are going to be on offer.

    This blog is supposed to be a deflation blog but the readers of this blog fail to admit that rising interest rates are actually Deflationary and falling interest rates are inflationary. I personally am convinced that the 10 year & 30 year T-bond peaked in june/july of 2012.

  6. After the war the UK had a debt level of 250% of GDP. In today’s terms, everyone would be pronouncing certain collapse. So what happened?

    By the 70’s it had been reduced to around 50% if my memory is correct. No collapse, and many years of splendid economic growth.

    Every time we have a recession, the “debt is too large” folks take on a tone that is reminiscent of a preacher proclaiming damnation in hell for those who sin. And every time, we emerge better off.

    No one ever seems to be able to explain to me what “too much” debt is – 100%, 150%, 200%, 250% or 300%? Many people are fond of quoting those large debt/GDP ratios. I and many others I suspect have on occasions had debt levels of 200% my annual income. If fact it takes about 3 or 4 times that level to purchase a property. And over the years I have managed to comfortably service the debt even when banks have insisted that I pay more interest. If fact the banks are happy to lend to me and have been known to offer me more!

    So just let me know what debt level is too much. And could you please let me know what “the inevitable” actually is because the Feds have printed money for a long time and history shows that things actually get better in the long run.

  7. It seems like Bass has been overwhelmed by the hubris virus, not much different than John Paulson.

    Even if his thesis was right, he should know that we live in a probabilistic world in macro investing, so he should have structured his trade giving thought to worst case scenario, probability that he is wrong etc. Obviously he has risked too much capital to a point in time forecast – unacceptable.

    Now regarding his premis – in the short term he definitely looks wrong and it is still difficult for me to see a clear catalyst for him to become right. It is obvious that the current fiat based system faces some strains due to overextended FRL, but a clear turning point is not evident.

    Your analysis of Japan vs. Greece is absolutely correct.

    And finally – shorting JGBs has been a losing trade for decades. He knows that. So I say – hubris.

  8. Why this should be a deflation blog? It is more of an inflate through the government spending blog.

    So far people have been conditioned to treat Central Bankers as the Wizards of Oz and there is still no clear sign of this abating. So you are right fundamentally, but practically perception is reality in markets until you see a clear catalyst for this religion dying.

    Until then, there is little left, but to join the Pavlovian dogs on most occasions. Unless it is October 2007, which resembles a lot the current situation.

  9. Just a thought on predictions from economists.

    I have always had the suspicion that economists who made completely “crazy” predictions ( let’s say S&P at 500 or 2500, $/€ at 0.75 or 2) were actually very cynical.

    If it turns out to be be true in a relatively short time frame (could be a year or two), then they become GURUS and are basically set up for life.

    If they are wrong, nobody cares. Just another economist being wrong.

    If you look back over the last 30 years, you see a few of them ( Henri Kauffman, Abbi Cohen, Roubini to name a few) who basically made predictions which at the time looked out there and lived happily, richly ever after. Even if subsequently, their other predictions were wrong.

    They lived off their one off prediction

  10. Someone has to be wrong to take the other side of a trade.

    So as far as I can see, the more wrong the better.

    If everyone always made perfect decisions and choices the world would be a much harder place to make a living. Failure is a requirement.

  11. Retail investots are such easy targets. Sheep among wolves. Most perople don’t have time to keep up with this stuff- it may never change. BTW good summation Arsene.

  12. Sounds like the galbraith crowd who celebrated the communist ussr economy and ridiculed the naysayers by telling them ‘it has worked for seventy years, how long do you naysayers think it will take to collapse?’ that’s a paraphrase, but accurate. you must have been one of his fans.

    If there is anyone who really needs to apologise, it’s the crowd who told us if they borrowed and spent 4 or 5 trillion of taxpayer money it would keep unemployment under 8%. Why isn’t anyone asking them for an apology?

    This is just great. Now we have no right to critisize obscene economic policies unless we know the specific date that it will all collapse.

    Mauldin had a recent article over the weekend at BI for folks like you.

  13. Not always. Two people can be on the opposite side of a trade for different valid reasons.

    Easy example : if one covers a short at a good profit, both the buyer and seller have a good reason and nobody is wrong.

  14. Arsene,

    Great observation. When 10’s of thousands of predictions are made every year, one or more of them are bound to be right. So we take the right guesser and turn them into an “expert” based upon their blindfolded dart throwing that just happens to hit the bullseye.

    Taleb has a lot of fun with this idea in Fooled By Randomness a book I heartily recommend for the cynical amongst us.

  15. “Or do we just live in a world where anyone can say anything and no one is held accountable for being totally wrong?” – Absolutely correct. In the information rich society we currently enjoy, nobody is invalidated, but no one is correct. There is no arbiter of fact vs. fiction, just opinion floating around in space.

  16. Your analysis is not complete and that matters a lot. Yes after WW2 US and UK had a real great economic growth but a large and prolonged financial repression with negative real interest rates. This was greatly facilitated by the fact the incomes were really growing etc… But most of the pillars of that growth are gone. History NEVER repetas itself and when one starts his reasoning which something like “in the past we solve it” but forgets to analyse the differences bewteen the past and now is just creating an illusion. Essentially you are keeping all the facts that confirm your thesis while discarding all the others.

  17. I vote for: “we just live in a world where anyone can say anything and no one is held accountable for being totally wrong.”

    The field of economics is, at best, a pseudo-science, for exactly this reason. As you note, economists seldom construct falsifiable theories, and even when they do, they do not reject a theory simply because that theory has produced false predictions. As a result, most economists can be most accurately classified as ideologues, not scientists, and ideological beliefs are not constrained by reality.

  18. It’s always humorous to me when an extremist on the right comes in here and attacks me for being socialist. You can always guarantee that a lefty will come in at some point and do the same to me claiming I am too much of a rabid capitalist. The bottom line is this – we’ve created govt as a tool that we utilize to help increase our living standards. The way our system is designed is NOTHING like the USSR so invoking that name is silly. The system is designed specifically to empower the majority. Attacking a govt like ours in an ideological fashion is irrational. All govt spending is not bad. That is a simple fact of life. And the math behind recessions is rather simple. When the private sector spends less than its income output goes unsold and unemployment results. The govt can always offset this decline in income by spending. That doesn’t mean they always should, but I believe they certainly should when we’re on the brink of a depression or very deep recession like we were. The spending helped keep this economy from collapsing. And if we’d spent more and not forced the states to slash their budgets as we did (state and local employment has crashed under Obama) then we’d be seeing a much stronger recovery….What has been 100% wrong is all the extremist small govt views which predicted hyperinflation, crowding out, higher interest rates, default, etc….You need some balance. Big govt is no better than small govt. But there’s no place for extreme views in this system….

  19. I actually do not think its fair to say that Bass is wrong based upon timing given that, according to my understanding, he bought payer swaptions with a 3-5 year expiration.

    On whether or not the bet makes sense from a financial perspective, I think it is complicated and nuanced. I think Bass is correct that market forces with cause rates to rise in the not too distant future. However, higher rates would eat up all of Japanese revenue very quickly, so the BOJ/government would have to respond one would think. Will they monetize and kill the currency? That would seem to be the most likely scenario. But they will not monetize until rates have actually risen to a point at which they threaten government finances. So there is certainly a window in which Bass could be correct (meaning he would make significant money), though its quite possible that rates are not the most effective mechanism to bet against Japan.

    I think people sometimes get caught up in the intellectual argument and ignore that the point of his bet was to make money. And Bass does not need Japan to go bankrupt to make a multiple of his investment. If he put on his bet back in 2010 and used 5-yr swaptions struck 100bps out of the money, he could have made 3.5x his money with 10-yr JGBs @ 3.5%; at 5% he could have made 7.5x.

    This captures the essence of the trade: (1) the JGB curve 5 years forward was flat and assumed endless deflation making it very cheap to bet on an inflationary outcome, and (2) there exists inherent leverage in Japanese rates that could enable a substantial, reflexive spike higher in rates at some point in the future (i.e., if 10-yr JGBs moved from 1% to 2%, it is likely that they would keep moving higher, since interest would at that point consume so much of government revenue).

    So arguing that Bass is wrong two years later because Japan is not yet bankrupt is sort of silly in my opinion, as it ignores the duration of his bet and assumes that the country has to BK for him to win.

  20. From about 1970 (1980 ?) the purchasing power of wages decreased but consumers were able to bridge the gap between income and expenses by going deeper into debt.

    And falling interest rates enabled governments and the private sector to go deeper and deeper into debt.

    The problem is too much debt in both the private and public sector. As long as everyone can service its debts then all is OK. And that’s the problem of the current crisis. The private sector can’t service its debts anymore and doesn’t want to take on more debt. But now the public sector is reaching/has reached the end of the road when it comes to “kicking the can down the road”.

  21. This is the second time Bass has taken a bite at the Japanese apple. You would think he would’ve changed his economic framework after that.

  22. I would say that ultimately fund managers are accountable, however I would then be reminded about MF Global, PFGBest, and on and on where now even so-called segregated customer funds simply aren’t – even from a legal perspective.

    There is no accountability. There is only fraud and how much you can get away with without getting caught… or if you do get caught how powerful your friends are or what dirt you have on people to thwart prosecution.

    While the above is overly pessimistic… you can’t deny the sum of recent events and judicial decisions and so few number of prosecutions of financial fraud (Galleon notwithstanding) are sending a message loud and clear to Wall Street.

  23. This post is part of the ‘Nyah, nyah, where is the hyperinflaation’ series!
    Two problems with that. Let’s say that excessive federal debt leads to inflation 20 years from now — well, history will say that the hyperinflation predictors got it right (although none of them will make money of the trade.)
    Second problem is more germane to the discussion. Let’s say that excessive federal debt leads to a 10 percent chance of hyperinflation in the next 10 years. Would we be wise to risk a 10 percent chance of that kind of disaster for a few basis points of GDP growth today?
    That’s my main problem with our present policy. Too much risk for questionable good.

  24. An “inflate through the government spending” blog ? Yes, I agree.

    The situation resembles more august 2008.

  25. I haven’t forecast deflation in years. And no, I believe in a normal rate of inflation through private sector spending primarily. That’s how inflation works for the most part. Businesses raise prices when they have pricing power. A little inflation is perfectly normal….

  26. There needs to be a plausible story with a well-defined causal mechanism that would create hyperinflation in the world’s biggest economy. I’ve never seen that argument made in an articulate, convincing manner – at some point, there’s a hand-wave and we have hyperinflation.

    There would need to be a serious global disaster that destroys or renders useless significant parts of the US real economy. Yellowstone erupting sounds about right. Without something like that, there’s no way – no !@#$ing way – that we’re going to see inflation going much above the Fed’s desired level.

  27. I know it’s an extremely vague answer but it can last until a debtor can’t service its debts anymore.

    And that includes the japanese and the US government. And after 2008 the US Debt/GDP ratio continued to increase.

  28. what is hyperinflation versus inflation…………….? Is 15% pa hyperinflation..? I’ve experienced 15% and nobody called it hyper but that was then and this is the future we are talking about. It is what it is to whom calls it. There is no agreed baseline anymore (to anything). It is what it is depending on your point of view.

  29. Alberto

    I know it does not repeat but it rhymes. My main point is that debt increases but nobody can tell me what level is too much.

    I understand there are differences, there always are but it seems that many again invoke the “this time it’s different”. So what is different this time?

    After the war there were about 500 million potential capitalists. Now there is 3 billion. I would argue that there are plenty of pillars.

    As I stated, it seems that every recession there are those that blame debt, renounce borrowing and then we carry on as usual.Until the next downturn……

    Every time I look I just cant find anything that tells me life was better when we were on the gold standard and that life is getting worse.

    I would be happy to see contradictory evidence but where is it. All I seem to get is statements and slogans that are based on ideological beliefs not from what I call facts.

    Or the inevitable…”you wait it’s coming”. well I am still waiting.


  30. Hugh Hendry said something along the lines of (and I agree): “We expected the US to get intro trouble first, then Europe and then China + Japan”.

    I agree with Hendry because I look at (yes, here we go again) the Current Account. The US has a LARGE C.A.D(eficit)., the Eurozone has a (in comparison) tiny/small C.A.D. and both Japan & China had a C.A.S(urplus). As said many times before, a C.A.D. means that a country depends on the mercy of strangers to fund it deficits whereas someone with a CAS can “kick the can down the road”.

    But now China has a CAD and Japan is moving fast towards a CAD.
    But the US will shake on its foundations AS WELL (AGAIN), when the next crisis hits. No matter, how much money the FED “prints”.

  31. great post. agree.

    question for Cullen: do you think interest rates will ever rise again in Japan and the US?

    honestly. if MMR works as great as it does right now (negative interest rates, still no inflation) – why would central banks ever raise rates again and harm public and private margins?

    same with taxes. will they ever rise again?
    do we need taxes at all if we have central banks to cover all needs?

    just asking.

  32. Hyperinflation ? Oh yes ! Quite possible, under the right circumstances. When Bernanke literally starts printing currency (e.g. $ 100,000 banknotes) and start showering the US with those banksnotes then hyper-inflation guaranteed. But, surprisingly, then we’ll get Hyper-Deflation first.

  33. We don’t have to wait for anything, we can know they’re wrong if they don’t have an institutional analysis (institutional analysis meaning creating a step by step procedure of understanding how the system will change) of what’s going on. Here is what I said recently elsewhere about stuff Mike Norman typically says:

    “What makes MMT a better perspective is that it tries to show where the system will go from here (the very definition of institutional economics). Most other perspectives don’t do any such thing at all, which is why they are not doing a scientific analysis of our social system. Even MMT on it’s own doesn’t do this perfectly, but by itself it’s one of the best there is.”

    “actually kelly, most schools of thought don’t make predictions, only MMT and some other heterodox schools of thought make such predictions. Neoclassical economics exists not to predict anything, but to promote it. If they do make predictions anywhere, it’s outside of their formal models.

    It’s the guys who have no (institutional) analysis (and only their intuitive gut that make predictions that should be regularly apologizing to the public for being flaming idiots. “

  34. Mises, Hayek, & other right-wing politicans (watch political ads from the 1950s on youtube!) HAVE BEEN PREDICTING THE COLLAPSE OF THE US DOLLARS, hyperinflation, & sky-hi interest rates, etc from the huge, “unsustainable” national debt & defcit since the 1950s

    And Ron Paul, Lew Rockwell, & his ilk has been predicting the same false things since I’ve subscribed to their newletters in the 1990s

    They’re chicken-littles who are immune to facts, evidence –they’re just ideologues following their ‘creationist’ religion regardless of any evidence in the real world… point them to radiometric dating, matching DNA, fossils, etc & they will just discount it

  35. A little inflation is normal & expected because population growth rate is 2% to 5% per year, thus a 2% to 5% increase in demand for food, housing, etc per year also, regardless if there’s any money creation or not

    UNLESS production/supply increases more than population growth

    Since the past 80 yrs, the US has averaged 2.6% inflation per year according to official data… thats pretty good considering population growth rates

  36. Waiting is correct as we have been waiting for the deficit bomb and national debt tsunami for the last 40 years that I know of.

    The problem is trying to get through our heads that the government borrows and spends it on us. We have the money and we spend it. Then the government taxes it back.

    More worrisome is that our kids can’t build anything in this country so they will end up renters on their own soil dependent on government checks.

    While we fiddle Rome burns.

  37. Iit will be very difficult for the US or Japan to raise rates without the govt going broke ( not that they are not now…)

    Rates rising to 5% would raise the amount needed to service the US debt to around 800 to 900 billion USD. If you removed ALL discretionary spending (literally 100%) you would still have a shortfall in the US budget. Add the further decline of private and public sector demand since you cut all those jobs and raised interest rates, tax revenue would bottom out causing you to need to borrow more money and hence have even higher interest burden the following year.

    Unless of course you want to print your way out of this. The problem with MMR is that it is essentially a shell game. While it has staved off deflation in nominal terms, the real impact on Main St. Is non existent. We are in bad shape. This allows us to appear healthy but the economy still sucks. The numbers are gamed and will continue to be gamed.

    You don’t have be an Austrian to see that this system is not sustainable.

  38. A lot of the devotees to those guys were also among the few who predicted the bubble in 2007. It is possible that a broken clock is right twice a day, but then again in this instance most of the conventuals wisdom proved wrong and they were correct.

    Personally I stand somewhere in the middle. Keynesianism works, but not all the time. I think this is one of those times. Europe is hosed and that will kill the US as well. It’s gonna be a rough ride the next 2 years.