Prediction-addiction, despite being in a fog

We are usually wrong in our predictions about the economy and market, especially since we bring in our own biases to fill the vast gaps in our information. And yet, we cannot help but predict

After Covid came, India went into one of the severest lockdowns in the world. Movement was severely constrained, only essential services were open and many segments of the economy remain shut or severely restricted even today. As a result, the growth rate in gross domestic product (GDP) for the April-June quarter, as expected, turned out to be horrific — a contraction of 23.9 per cent, which was worse than the most bearish estimate. GDP is expected to suffer a further contraction of 10-12 per cent in the next quarter (July-September). If this proves correct, we would be officially in a recession, since economists define recession as two consecutive quarters of contraction. But that is the theory. And then, there is the actual data.

Cement manufacturer Ambuja Cement reported its results last week. Its consolidated net profit was up 50.5 per cent year-on-year. Even assuming that some sales of the severely restricted June quarter were shifted to July-September, the results are absolutely stunning. Net profit for the April-September period is more than in the same period last year. Cement is a basic commodity, most needed in construction. Despite a severe economic contraction, Ambuja Cements recorded higher volume growth, as did Ultratech Cement. Ambuja’s share price is now at a two-year high.

If someone had told you this could happen against the backdrop of rapidly rising Covid-19 cases, continued lockdown, and economic recession, you would dismiss him as loony. But the facts turned out to be different. The story is not limited to cement. Other sectors such as steel, paints, packaging, chemicals, pharmaceuticals, and software have reported far better results than expected; some even better than in the same period last year. Their stocks have risen beyond the pre-crash levels. Some have hit all-time highs. Some companies have even benefited from the pandemic either through cost reduction, or higher revenues, or both. None of this was expected. This should be a humbling experience for us. But this will not deter a variety of experts from confidently forecasting the future, every single time we are faced with uncertainty.

Look at the situation today. No one may have predicted the severity of the Covid pandemic, but once it was upon us, aren’t there a million predictions about what kind of impact Covid will have on our future? Aren’t people predicting confidently that some things have changed forever, the world will never be the same again, work from home is here to stay, health and hygiene is going to be a top priority from now on, etc. How do we know any of this, with any confidence? We don’t. But we have a natural desire and also enormous confidence in our ability to forecast — no matter how many times we are wrong. Exactly the same thing happened after the global financial crisis of 2008.

That crisis rocked every country — from tiny Iceland to the mighty United States. But miraculously, a global, synchronised market rally started exactly in March 2009, against the consensus that no sustainable recovery was possible. Analysts, economists, and fund managers all over the world were in the same highly sceptical camp. Their argument? How can the economy revive so fast? Businesses and consumers are too scarred by the crisis and the fiscal health of many governments is anaemic.

However, the market went on a relentless rally for two years, and paused in mid-2011, only when a new crisis came on the horizon. This was when the euro seemed to be disintegrating, supposedly taken down by the sick PIGS (Portugal, Italy, Greece, and Spain) economies. Exactly two quarters later, by the end of December 2011, a new rally started in the US, lasting for two and a half years, taking the main market index to an all-time high. After a blip in September 2015, another “melt-up” began, lasting for three years. After a big decline in the December quarter of 2018, the market roared higher in 2019. The truth is, as new facts emerged, the market adjusted to them.

According to a relatively new theory, markets and economies are complex, emerging, and adaptive systems. If you scrutinise these three features, you will know how impossible it is to make any prediction. We will never have enough data about the economy because it is too complex and always changing. No wonder we are usually wrong, especially since we bring in our own biases to fill the vast gaps in our information. And yet, we cannot help but predict. We are born with a desire to make sense of things around us. We seek cause and effect in everything, even about things that are unknowable. Based on that, we want to know what is going happen.

Indeed, the deeper we are in a fog of uncertainty, the more is our inclination to predict. It is because of this prediction-addiction that we see fretful discussion everywhere today over the “disconnect between the market and the economy”, about “green shoots”, a possibility of “double dip” (very popular but eventually discredited term in post-2008 recovery), whether investors should “wait for clarity” or “dip their feet” and endless rubbish of this sort. As the late William Goldman, Oscar-winning writer of superhits like All the President’s Men and Butch Cassidy and the Sundance Kid, said about what kind of films become a hit — the fact is, “nobody knows anything”. 

The writer is the editor of www.moneylife.in | Twitter:@Moneylifers