Keeping You

Famous Economist Predicts Another Global Financial Crisis

24 Nov 2017

A client saw an article in the NZ Herald On-Line by a famous economist, Niall Ferguson, that predicted the next global financial crisis. Our client wanted us to comment and Jared put together this response. I thought it was so good I thought we should share it.

"Thanks for sending through the link to the article. Very interesting and worthy of a discussion.  We see a lot of these predictions and unfortunately, they just make up a kind of background noise that we all have to work in. They are not helpful in making any actual investment decisions. I’ll explain why. 

Firstly, your investment portfolio is designed for the next 30 years.  Not the next 3 weeks, or 3 months.  Acting on economic forecasts is what we call ‘market timing’ and independent research tells us it is a waste of time and costs investors hard-earned money in lost earnings every year. 

I have no doubt that I could find you an article like this one produced every month (possibly every day) since the last Global Financial Crisis ended.  Sure, this guy may have form in predicting a past crisis but how many crises did he predict that didn’t eventuate? To test this theory out I have just googled “Niall Ferguson financial predictions gone wrong” and out jump numerous articles proving his predictions wrong.  For example:

  • In May 2011 he wrote an article called “The Great Inflation Of The 2010s” …. so far, this decade we have record low inflation and in fact some countries, like Japan, are suffering from deflation.  Verdict:  Wrong
  • In February 2010 he predicted the Greek crisis was coming to America.  Verdict:  Wrong.
  • In June 2009 he predicted a painful conflict (imminently) between monetary and fiscal policy. Verdict:  Wrong.

The point I make here is that stories like this are easy to write and easy to publish.  There’s always going to be people predicting the next downturn.  The professors and academics who don’t have an axe to grind I pay a little more attention to when it comes to predictions. The best academics admit they have no ability to predict markets with any degree of certainty, so we don’t make any investment decisions based on anyone’s crystal ball forecast.

We treat anything written in the media as entertainment only.  Media are in the business of collecting eyeballs, so they can sell advertising space. To get people to click on an article they will often use bad news items as unfortunately, bad news attracts attention.

Just to highlight my point on the media, in the article Niall touches on the meteoric rise of Bitcoin, “up by a factor of seven since the year began” ….. and at the bottom of his very article talking about the next financial crash we have an advertisement selling Bitcoin sitting neatly between some other gloomy stories!

Finally, Niall may actually prove to be right in predicting the next crash. No-one knows at this time. You are invested for the long term. Your portfolio is up 8% per year compound return since you started in April 2014. Over this time, someone has been predicting a crash at least every week, and you’ve stuck to your guns and enjoyed some good returns. We know the road will be bumpy at times over the next 30 – 40 years but your portfolio is designed to ride through all that.

I hope that was of some help!"