The 3 Worst Financial Predictions of the Last 5 Years

All this talk about the crisis and predictions got me thinking….We all know how difficult it is to forecast the future.  But every once in a while we see predictions that are so far off the mark that you have to wonder if the forecaster is working with a full deck.  Which is actually a great thing because it’s beneficial for the rest of us since we can study these kinds of predictions and understand why they were wrong and what can be learned from them.  I often say “it’s only in being wrong that we can learn to be right”.

That said, what were the very worst predictions of the last 5 years and what can be learned from these bad calls?  I provide my views below:

3)  The municipal bond crisis that never happened.

Meredith Whitney became famous for calling the collapse of many of the banks back in 2008.  But that wasn’t the only crisis she predicted during the last 5 years.  In 2010 Whitney also said state and local governments looked very similar to the banks in the pre-crisis period and predicted that states were the next systemic risk.  She called California the worst state in her analysis and stated that a double dip in housing would lead to bigger problems.  None of this actually came to fruition and the states have actually made a stunning turnaround.

Shortly after her famous 60 Minutes interview called “The Day of Reckoning” I said Whitney was wrong (see here) and drawing parallels to Europe that were incorrect.  3 years later many state and local budgets have seen huge improvement and virtually no one is talking about the potential of a municipal bond crisis.  The municipal bond crisis simply never happened.

The Lesson: Understanding the monetary system from a macro perspective proved hugely important following the crisis.  Those who compared the states in the USA to Europe ended up being very wrong.  And the difference was simple.  A UNITED States of America is made up of 50 states who all pay into a pool of federal funds.  And those federal funds get distributed in a way that substantially reduces the financial burden on any single state.  In fact, the poor states (like Mississippi) pay far less into the system than they take out and that system of redistribution actually helps weak states avoid default.  This arrangement doesn’t exist in Europe and it’s a big part of why a single currency system doesn’t work there.

For more on this, please read “Why there was no Euro crisis in the USA”.

2)  Every single hyperinflation prediction.  

There was a bubble in hyperinflation predictions in 2008/9 following the huge fiscal stimulus package in the USA and the supposed “monetization of the debt” which people still believe to this day due to misconceptions over quantitative easing.  Personally, I think the hyperinflation predictions have to rank among the very worst economic predictions of all-time because the reasoning was so misguided.

Those who predicted hyperinflation were not only entirely misinterpreting the debt de-leveraging, but were misinterpreting how the monetary system works at an operational level.  The chart we most often saw was the chart of M1 money which implied that higher bank reserves would lead to a multiplier effect in the money supply and eventual collapse in the dollar.  Of course, it never happened and the USA has been mired in a weak economic environment much more closely resembling deflationary Japan in the 90’s than hyperinflationary Weimar in the 20’s.

The Lesson: There were so many great lessons to learn from this.  From the way banks lend money (the money multiplier is a myth) to the way QE works (see here) to the fundamental cause of most hyperinflations (see here).  These wrong predictions covered a vast area in understanding the monetary system.

1)  “the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained”.

I’m stretching my “5 years here a bit” and I know it’s a distant memory now, but back in 2007 Fed Chief Ben Bernanke made what has to be one of the very worst predictions in economic history when he said subprime was “contained”.  Just months later we would end up seeing massive bank defaults due to subprime and a financial crisis that brought the US economy to its knees.

Some people say we owe Dr. Bernanke a great debt of gratitude, but we only owe him a debt of gratitude like a fireman deserves a debt of gratitude after he sees a small fire break out, ignores it and then helps put out a wildfire after it burns down half the neighborhood.  I’m often hard on Dr. Bernanke, but only someone with a very short memory wouldn’t be….

The Lesson: Be wary of the predictions made by academic central bankers.

Edit: Honorable mention via the comments section: The ECRI’s recession call in 2011.  


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Cullen Roche

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. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Matt

    I’m not sure that Meredith Whitney should even be given credit for “calling” the financial crisis. I’ve never read her direct research, but just putting a sell call on the banks and saying that Citi would have to cut it’s dividend is not the same as predicting a global financial crisis. Hell, I’m an absolute nobody and I knew the banks were a short and that a bunch of banks would have to cut their dividends AND I predicted a credit crisis and recession that would take the S&P 500 down to 1,000. Alas, Mr. Market decided to meet my bet and raise it for an additional 33% loss before the bottom hit. Predictions are fun, but even if they are mostly right, it doesn’t automatically make you a master of the market.

  • Gary_UK

    Oh Mr Roche, you have confused your tenses in your article.

    You wrote ‘predicted hyperinflation’. You should have wrote ‘predicting hyperinflations’.

    Just because it hasn’t happened yet doesn’t mean it isn’t going to, and it still is going to happen, that is a certainty. Please be more patient before getting over-excited in your confirmation biases.

  • SS

    Meredith Whitney is trying to revise history.

  • Jeff

    Roche is not arguing that the US will not see hyperinflation from an absolute standpoint. Of course, some outside event could shake this nation to the core and hyperinflation would be a possibility. However, he IS arguing that hyperinflation will not be directly related to QE. Many believe that the Fed’s continued asset swaps will lead to inflation. This assumption reflects a poor understanding of our monetary system.

  • InvestorX


    ” The chart we most often saw was the chart of M1 money which implied that higher bank reserves would lead to a multiplier effect in the money supply and eventual collapse in the dollar.”

    Actually M0 (in the UK) is where reserves are included. In the US it is the “monetary base”. So I think this sentence needs to be edited.

    Another point: I still do not understand why you say QE is not printing money. To the extent it is with non-banks it leads to a direct increase in M2. Of course this increase can be offset by deleveraging. And of course in a $50tr debt economy, printing $2tr is not hyperinflationary. But it is still money printing (and debt monetization as well).

  • Cullen Roche

    M1 in the USA is the M1 money stock which is coins, cash and deposits. I think the UK lists them differently. The point I am making is that we saw lots of charts displaying some sort of increase in reserves (a reserve balance chart is most notably referred to with the vertical explosion in reserves).

    The reason I don’t refer to it as “money printing” is because I think that’s a misleading way to describe it. “Asset swap” is my preferred description. Money printing implies that we’re dropping money from helicopters when we’re really just swapping assets. If you want to be really technical, the term “money printing” isn’t all that far off because we’re swapping one asset with lower moneyness (the t-bond) with another (a deposit or a reserve), but if you’re going to say that you should be very clear that that doesn’t automatically imply higher inflation….

  • jaymaster

    That ECRI recession call about a year and a half ago was pretty bad too.

  • Cullen Roche


  • Nils

    Got any timeframe? If not you don’t have a trade. I could just as well predict the Cubs winning the world series.

  • Cullen Roche

    He’s been predicting hyperinflation in the USA for years.

  • InvestorX

    My first point is that M1 does not include reserves, but the monetary base does in the US. In the UK M0 contains reserves. So QE’s growth in reserves is visible in the monetary base, but not so much in M1 in the US.

    The point with QE beng money printing is that the money is created out of thin air (digital printing of reserves), buys debt (debt monetization) and to a degree directly translates into inside money growth. It is of course not the only supply of inside money growth and is limited in comparison to outstanding debt, so the inflationary effect is minimal. I guess if the Fed printed $20-30tr and swapped them with the non-bank sector, Inflation will be visible immediately.

  • Tonka

    I would hesitantly put that ahead of the muni bond crisis. Or at least 3a and 3b. Individual analysts, even ones that run their own research firms, get discredited all the time and we simply move on. For someone as well respected as ECRI to step in front of their own data was truly bizarre.

  • SS

    This was a terrible call. What made it worse was their denials. This is also another one Cullen nailed.

  • Tom Brown

    I agree with you that the Fed creating Fed deposits for other entities out of thin air is akin to money printing. However, in our system of double entry accounting, I like to think of it as exchanging an IOU for other assets (which also happen to be IOUs for the most part: i.e. Tsy debt and MBSs). The Fed’s IOUs are special: they are outside money dollars (Fed deposits or paper notes), but in whatever form they are still Fed liabilities. Similarly a bank’s IOUs (bank deposits) are defined as dollars as well, but in that case inside money rather than outside money. Everybody else’s IOUs are less than dollars on the moneyness scale. But in principle, the Fed’s “money printing” is akin to you writing out an IOU for something: it’s not the same as you just creating yourself an asset (counterfeiting for example).

    Now when the Fed buys debt, it’s not quite the same as monetization of Tsy debt. It would be if the Fed were taking orders from Tsy and it was allowed to buy the debt directly from Tsy. That way Tsy would always be guaranteed that it had a buyer for it’s debt since it could completely control a bottomless pocketed buyer. But that’s not exactly the case. For one, the Fed is independent. For another, it’s not allowed to purchase Tsy debt directly, thus forcing Tsy to turn to the private sector for buyers. You may consider that a small difference, but I think it’s an important one.

    Regarding this part:

    “…and to a degree directly translates into inside money growth.”

    I suppose the key part there is “to a degree.” But I really don’t see QE as contributing to inside money growth. If there were no excess reserves banks would still not be constrained by reserves. The Fed would be obliged to provide them at its targeted rate in whatever quantity was needed, otherwise they couldn’t achieve their targeted rate. I don’t think that ER promotes or contributes to lending in any way. Banks are still capital constrained in their lending, and QE2 & QE3 don’t really help (too much) with these capital constraints either. The only help they really provide is by adding to the trickle of IOR which would have been smaller w/o the QE to non-banks (QE to non-banks having the effect of growing bank BSs with excess reserves and offsetting demand deposit liabilities). Cullen points out that with QE1 this was not the case, since it directly contributed to improved bank capital positions.

    “I guess if the Fed printed $20-30tr and swapped them with the non-bank sector, Inflation will be visible immediately”

    I think it depends on what they buy. With that much I think they’d run out of Tsy debt and have to start buying other assets. If they were to buy commodities making up the basket of goods in the CPI then it would definitely be inflationary! I don’t think they are allowed to do that though.

  • Gary-uk

    Yes, around 2 years I think, 3 at most.

    My expected timeframe is 2017-2020.

    Civil war in the US also a racing certainty, as I see the totalitarianism being fought at the end.

  • Gary-uk

    The ‘trade’ is just to hold physical gold, not Etfs, the real stuff, until the new global monetary system emerges. I’ll leave traders to chase paper gains in other papery stuff.

  • ehcor nelluc

    Here’s a crazy prediction: The undereporting of inflation + plus the overreporting of employment will becaome all too evident to the people on Main St. Social unrest will grow as people become sick of eating dog food and riding rusty bikes to their fast food job, while seeing Wall Streeters and CEO’s drive by in the Bentleys. It will get bad enough that eventually the Fed WILL have to drop money from helicopters, in the form of outright checks to citizens to encourage spending, and THAT’s when hyperinflation will really kick in.

  • Bill

    Doomer fantasies. Most people in the US are living fairly prosperous lives, not eating dogfood. Especially compared to the rest of the world. Fortunately the fantasies of doomers are mostly being seen for what they are, which is why the fear trade is slowly collapsing all around them, causing them to dial up the fear rhetoric to max volume in a last ditch effort to get anyone to listen, lol.

  • ehcor nelluc

    I guess we’ll see who ends up correct :-)
    And it’s not a fantasy, it’s a nightmare I hope never happens. I like my fast food, internet, tech toys, and a working society. In a way, though, the free money is already happening in the form of entitlements (food stamps, disability, etc.) It’s when those entitlements are not enough to afford the comforts that the problems begin..

  • Tom Brown

    Gary, if we don’t adopt the “new global monetary system” by 2020 and we don’t experience hyperinflation by then either, would you change your opinion?

  • Tom Brown

    Thanks for posting that.

  • Tom Brown

    My co-worker who’s a regular reader of ZeroHedge calls it “bear porn.”

  • Mr. Market

    Meredith Whitney is spot on. Municipal defaults ARE coming. Surprisingly, “Obamacare” has saved the bacon of municipalities (for the time being). Interest paid on muni bonds are (A) tax deductable and (B) “Obamacare” tax exempt. So, as a result investors are flocking to muni bonds in droves. Remember, tax on other bonds is at 40% and are NOT “Obamacare” exempt. And that’s precisely the reason why I expect yields on the 10 year T-bond to go to say 1%, as investors flee muni bonds and flock to T-bonds again.

    Never heard of a thing called “supply & demand” ??

  • Mr. Market

    Depends, if the US starts to literally printing money (=banknotes). But they won’t do that (for the time being) because it would send interest in the US through the roof.

  • Tom Brown

    The Fed treats banknotes in almost exactly the same fashion as they treat electronic Fed deposits. Both are (face-value) liabilities of the Fed after being distributed to the banks. The main differences between banknotes and electronic Fed deposits are

    1. The Fed must buy the banknotes from Tsy for the cost of production (rather than type them into existence as they do with electronic Fed deposits).

    2. The Fed doesn’t pay IOR for banknotes held at the banks (as they do with electronic Fed deposits).

    While at the Fed, banknotes don’t appear on the Fed’s balance sheet… just as electronic Fed deposits which have not yet been typed into existence don’t appear on the Fed’s BS. While at the Fed they are essentially worthless pieces of green paper.

    Banknotes are there to meet the public’s demand for the convenience of holding cash. If Tsy printed 10x more banknotes than they usually do, and the Fed were to buy them all (again for the cost of production, not face value), then they’d just sit there at the Fed until there was a demand from the banks which in turn would result from a demand from the public. Why would that demand be any greater just because 10x more bank notes existed?

  • Gary-uk

    I’d answer that in 2020, but all fiat currencies collapse eventually, so even if the dollar limps on past 2020 for a few years, I’d not change my view, which is shared by Bernanke, Noyer, the Chinese central bank head, the list is endless. It’s coming.

  • Tom Brown

    Can you dream up a plausible situation in which evidence might ever change your mind about your economic theories? What would that evidence look like and how would it change your mind? Any example will do.

    For example, I don’t believe Big Foot exists, but if he were trapped and put in a zoo, I’d be forced to change my beliefs.

    What if on your deathbed the fiat dollar, in its current form, were doing just fine, and had been doing just fine continuously from this moment until then. Would you change your mind then? Or not enough evidence?

    To say that fiat currencies collapse eventually is pretty broad: Countries collapse eventually. Species of carbon based life forms collapse eventually. Solar systems burn out eventually.

    While we’re on that, we could say that the dominance of precious metal based coinage subsides eventually. In fact it’s been going back and forth now between coins and credit as the dominant form of money for millennia. Coins weren’t even invented before about 600 BC. Before that the Sumerians, Babylonians, Akkadians, Israelites, and Canaanites (Phoenicians) used credit systems for 1000s of years. Actually the Phoenicians continued using their credit system to about 300 BC. Since then there have been several periods when coins were dominant and when credit was dominant. Each lasting a minimum of 500 years. We only just started a new credit-dominance cycle (1971). Why do you think it’ll burn out that quick?

  • Mr. Market

    The banknotes on their own, are not the problem.

    Currently the FED increases the reserves of banks, not of the public. If the FED would increase the reserves of the public (e.g. deposits or banknotes) then that would lay the groundwork for Hyper-Inflation.

    But then the public would start paying down their debts (=deflation) first. That’s why only after a significant amount of debt has been destroyed, hyper-inflation has a chance.

    1. “Hyper-Inflation requires Hyper-Deflation”
    2. “Hyper-Inflation is a political choice”.
    3. “If you expect Hyper-Inflation then invest in 30 year T-bonds first”
    Source: Hugh Hendry

  • european

    ‘…the poor states (like Mississippi) pay far less into the system than they take out and that system of redistribution actually helps weak states avoid default’. Is that not the reason why weak states remain weak states? If it is, is that not a good reason to keep such an arrangement out of the European Union?

  • Gary-uk

    Jeez, just look at how many ounces of gold your dollar can buy you now compared to the 1970s.

    The dollar has already hyper inflated, it’ll just take confidence in things like derivatives and debt based crap generally to collapse and a huge wall of money will be searching for a physical home.

    The worlds reserve currency changes every so often, the dollar has had a shirt run, but as the first fiat system it’s bond to burn out very quickly, just compare inflation rates from 1200s to 1900 and then from 1900 to date, you’ll see what I mean.

    Try going off to read Another and FOA, it may open your eyes.

  • Tom Brown

    “The dollar has already hyper inflated,” … based on how much gold you could have bought in the 1970s? Seriously? You can’t eat gold you know.

    If central banks target an X% inflation rate, and achieve it, then that’s exponential, no matter what X is. So lets see, since 1971, that’s 42 years, say at 2%:

    1.02^42 = 2.3 … doesn’t sound too bad (yes, I realize CERTAIN commodities may be worse… and I may not have the right inflation rate for those particular years), but exponentials always blow up at some point… lets try from 1200 at 2%:

    1.02^(2013-1200) = 9816115

    OMG! A 9.8 million times increase in prices!! Hyper-inflation for sure!… right?? … over 813 years… eh, not so much.

    Somehow that’s just not so scary to me. People like Ron Paul always quote prices from 1910 to scare people about how our “money has been debased” but I say, 1910? Who frinkin’ cares! All that’s important is what you can buy with your money today, or next year, or over the next 5 to 10 years… the mere fact that prices are exponentially inflating (along with interest) requires knowledge of the time constant (price doubling time) to be meaningful… but you can be sure that anything well beyond the time constant is going to look really scary to people! With 2% it doubles every 35 years… i.e. half a life time. I think most people can handle that! At 5% it’s every 14 years… that’s starting to get a little marginal. At 40% it’s every 2 years… that’s unacceptable for most people. But it’s all a psychological game… there’s no fundamental reason we couldn’t live with a 40% inflation rate…. other than the fact that on a human time-frame, it’s starting to *feel* a little uncomfortable. When, on a human time frame, prices double on your way to buy groceries, most people would throw up their hands and say “Hyper-inflation!!… Make it stop!” Our robot overlords of the future should have no trouble with it though!

    Sure, a gold standard system will have low inflation rates (unless huge amounts of gold are mined!). But in terms of human lifetimes, who really cares? Why is having the supply of money determined by mining activity any better of a system than a fiat system?

    And BTW, we’re not the first fiat money system! Not only was fiat paper money used in China a 1000 years ago, but David Graeber documents the history of money, and how it arose NOT from precious metals or barter but from the formalized notion of “I owe you one.” Credits and debits were recorded on 5000 year old Sumerian clay tablets long before precious metal coins arrived on the scene. In a sense, we’ve come back to that point yet again (as we have several times in the past). Double entry book-keeping (the basis of our IOU based fiat money system), is just a more sophisticated version of this 5000 year old Sumerian system.

  • Gary-uk

    Listen, you guys just don’t get the fact that the current global monetary system is not working, And hasn’t worked since Genoa in 1922. The age of inflation as predicted by Jacques Rueff.

    The ROW hates the dollar based system. The US currently just exports its inflation. Not for much longer.

    The rest of the world is turning the screw on the dollar, bypassing it for regional trade. The Euro is destroying the dollar slowly thanks to its sound management and use of gold as reserves.

    As international demand for the dollar fades, where do all of those homeless dollars flow? Back to the USA. Look at China pumping billions into real estate and dumping USTs.

    You have to be blind not to see the grand game being played out.

    And I have no problem with a well managed fiat, free from government meddling, hence I admire the ECB and the Euro.

    Just watch it all unfold, you will see in due course.

    Sidebar…. Was Meredith Whitney really wrong about a muni crisis, or is it just starting with Chicago? Time not timing is what matters.