Home / Comment / The real value of an outrageous prediction

The real value of an outrageous prediction

Pandemics, invasions, and the return of inflation. If the last few years have shown investors anything, it’s that outrageous predictions can often be anything but.

Saxo Bank’s annual “Outrageous Predictions” are rarely correct, but they’re correct more often than is really comfortable. In 2015, their analysts predicted that the United Kingdom would vote to leave the EU (right, but early); in 2017, they predicted huge gains for Bitcoin due to the macroeconomic policies of the Trump Administration (right, but due to speculation instead); and in early 2022 they predicted that climate targets would get kicked down the road as policymakers tried to fight inflation (right again, but mostly due to Russia’s invasion of Ukraine).

The new slate of predictions seems somewhat less outrageous than usual. In fact, the first – which comes courtesy of head of equity strategy Peter Garnry (photo at top), and holds that billionaires will band together to create a “Manhattan Project” for climate change technology – is downright probable, given that the Twiggy Forrests  and Andrew Carnegies of the world have positioned themselves as the answer to global climate change.

Your mileage might vary on other predictions: that Emmanuel Macron will resign the French presidency, that widespread price controls will be introduced to cap official inflation, or that a ban on tax havens will kill private equity (never happen, given how many politicians personally depend on them).

Outrageous predictions are all the rage right now. Anybody who’s spent any amount of time talking to fund managers in the last nine months will have heard how wary they’ve grown of “Risk X”: Rumsfeld’s “unknown unknowns”, Ian M. Banks’ “Outside Context Problem”, or Taleb’s (in)famous “Black Swan”.

Taleb’s characteristics of Black Swans are as follows: “First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme ‘impact’. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”

But Black Swans rarely occur; events that are deemed Black Swans are usually actually “Grey Swans”, though these exist outside Taleb’s taxonomy. To borrow from Investopedia, Grey Swans are “a potentially very significant event whose possible occurrence may be predicted beforehand but whose probability is considered small”.

Many a Grey Swan has alighted in the pond this year. Putin’s decision to invade Ukraine – despite a chorus of foreign policy boffins, politicians, economists, and fund managers saying that he’d be mad to do it –  caused a reassessment of how rational geopolitics really is. The near meltdown in the UK pension system saw the commonplace practice of liability-driven investing scrutinized by the Financial Conduct Authority.

Indeed, it’s this latter issue that many fund managers now fear: that, like some foolhardy archaeologist releasing an ancient curse from a sealed tomb, shoddy economic policy or the pace of rate hikes or will cause dysfunction in some unexamined part of the financial system – dysfunction that will spread throughout the whole system, roiling markets and economies alike. It’s the quintessential Grey Swan
event; predictable, but unlikely to happen, with devastating consequences if it does.

None of the Saxo predictions are Black Swans (having been spoken into existence, they no longer count), though they are deeply grey. And Grey Swans are likely to occur with increased frequency as the macroeconomic and monetary regime changes, the money-fueled tech bubble deflates, and geopolitical tensions flare.

So the value of an ‘outrageous’ prediction is just that. In 2021-2022, outrageous events have become commonplace. And while it remains to be seen whether the EU establishes its own armed forces or the UK decides to hold an “UnBrexit” referendum, predictions like these give investors the opportunity to stress test their own powers of foresight, which are rarely as robust as claimed. It helps to imagine the almost unimaginable. After all, what Saxo’s ‘correct’ predictions show is that the future is rarely settled; that most forecasts are written in sand, and that it pays to be prepared for anything.

Print Article

‘Don’t wait for APRA to blow the referee whistle’: Cole

While APRA “doesn’t feel the need to start each year with a shiny new set of initiatives”, it’s still planning on scrutinising super funds’ valuation practices and giving more “sub-scale” funds the nudge to merge in 2023.

Lachlan Maddock | 1st Feb 2023 | More
ISA, AIST explore merger for ‘a single voice’

The Australian Institute of Superannuation Trustees (AIST) is exploring a merger with Industry Super Australia as external pressure grows on industry associations and the funds they service.

Lachlan Maddock | 27th Jan 2023 | More
Why there’s a valuation standoff – and why it’ll end

While there’s widespread suspicion that “financial skullduggery” is afoot in private market valuations, the tricky part is the lack of comparisons in their fastest growing segment.

Lachlan Maddock | 27th Jan 2023 | More
‘An art, not a science’: 15 years of PE lessons from QIC
Lachlan Maddock | 5th Aug 2022 | More
‘In good markets and bad’, Super Fierce finds top 15 funds
Lachlan Maddock | 15th Jul 2022 | More