Baseball legend and inadvertent philosopher “Yogi” Berra quipped that “it's tough to make predictions, especially about the future”.
That has not discouraged Wall Street's modern day fortune-tellers who reap billions of dollars yearly for advice that has, by definition, a collective value of exactly zero. Earning one's fair share of these spoils is not so much about being right as not being very wrong. Or, if one is wrong, having plenty of company. Sticking to the herd, extrapolating the recent past and discounting extreme predictions are human nature after all.
But history is full of extremes. Stocks have lost nearly half of their value twice in the past decade alone and at least once a generation before, yet a suggestion that the same thing is about to happen again places one on Wall Street's lunatic fringe. Ironically, it was a lecture about cyclical patterns of admissions to insane asylums that sparked the financial career of Dr Charles Nenner, who is making just such a prediction.
Irreverent and iconoclastic, Dr Nenner has nonetheless gained admirers on Wall Street, having spent a decade advising Goldman Sachs on technical analysis and more recently selling his research to hedge funds. His views are based on a mathematical model contained in tens of thousands of lines of code that tracks not only financial cycles but also phenomena such as war and peace. He predicts a major military conflict between 2012-2015.
“These wars you have now – Iraq, Afghanistan – are minor conflicts. They don't even show up,” he says. The why, how and where do not much concern Dr Nenner, who ignores news headlines to avoid bias. His model simply tells him so. “My medical background teaches me I can work with facts without understanding them.”
Dr Nenner made some prescient public calls about the housing bubble in 2006, the Dow's 2007 peak, the recent bear market and the recent surge in grains prices, sparking media coverage of his grim outlook.
But he is positively Panglossian compared to Robert Prechter, the leading interpreter of the Elliott Wave principle and pioneer of “socionomics”, which tracks cycles of social mood. Mr Prechter attained guru status in the 1970s and 1980s by predicting the bull market and later warning his clients to dump stocks just before the 1987 crash.
Although he has tens of thousands of newsletter subscribers and numerous best-selling books, Mr Prechter's painfully premature bearishness has hurt his popularity. Undaunted, he now predicts that the Dow will fall to 1,000 – a drop that would exceed the Great Depression's epic collapse. He gives a socionomic explanation for public scepticism.
Both men see deflation as the underlying cause of a major bear market. In this they have company, but the notion that historical waves only decipherable by their esoteric formulas can predict the future has plenty of critics, earning unflattering comparisons to pre-Copernican astronomy. Mr Prechter, for example, is only the most prominent of many followers of Ralph Elliott, who devised his theories eight decades ago, and many reach starkly different conclusions.
To be fair though, imprecision does not disprove anything. The Fibonacci sequences that underlie both models describe natural phenomena like plant growth that leave plenty of room for variation at the edges. Getting the general timing and direction of financial market moves right, if not index levels, still would trump the average market sage. Both men share a disdain for backward-looking financial punditry. “It's hilarious to watch people all day explaining what happened on financial television,” says Mr Prechter. “At least we're predicting them ahead of time.”
Critics might gripe that dire predictions are a ploy to grab the spotlight, but Wall Street's finest are equally biased in underestimating booms and busts. A year removed from the economic precipice, they may be giving such outcomes unduly short shrift. As Yogi himself said, “the future ain't what it used to be”.