Market analysts do not always see through the bull

A financial crisis is bad enough, but how would you feel if you were warned in advance but did nothing? How would you feel upon hearing those four dreaded words, "I told you so"? Tim Lee of Pi Economics has recently been enjoying his own "I told you so" moment. Lee "has been warning that a financial crisis in Turkey would set off a wider calamity in global markets" for the last seven years, the New York Times reported in a recent profile. "Just about nobody listened – until now."

In 2013, Lee forecast that the Turkish lira, then trading at 1.9 to the US dollar, would collapse to 7.2. That seemed “ludicrous” at the time, but the 7 level was breached last month.

Now, Lee reckons another global crash is coming, one he says "will be worse than 2008 in certain ways". His "largely ignored prophecy" no longer seems so "outlandish", said the Times, which ended its report on an ominous note. "It won't be a banking crisis this time around – it will be a financial market crisis," Mr Lee said. "And I am very confident that it will happen."

Familiar story

It's a familiar story – the smart, unheralded hero who sees through the bull (pun intended), only to be ignored by a complacent establishment. Think of doctor-turned-hedge fund manager Michael Burry, immortalised in Michael Lewis's The Big Short as the eccentric genius whose prescient bets against the US housing bubble earned fortunes for his investors. Think of Jim Chanos, who complained that he and fellow hedge fund manager Paul Singer warned G7 ministers in 2007 that many of the world's biggest banks were in real danger, only to be greeted by "polite applause and stifled yawns".

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When Nouriel Roubini addressed an assembly of International Monetary Fund economists in 2006, his doomsday opinions “seemed to be those of a madman”, said IMF economist Prakash Loungani, “but he had become something of a prophet” when he returned to give a conference at the IMF in 2007.

Nostradamus status was also bestowed upon a host of other names in the aftermath of the global financial crisis, including hedge fund managers such as John Paulson and Crispin Odey, contrarian investor Jeremy Grantham, and market strategist David Rosenberg, amongst others. The problem, as Paul Krugman tweeted in the aftermath of the New York Times' Tim Lee story, is that "when you find someone who correctly predicted a crisis, he usually turns out to have predicted many other crises that never happened".

Indeed, anyone who followed Lee’s advice over the last nine years has missed out on the longest bull market in history. “US Economy is Not About to Recover” was the title of a client letter penned by Lee in May 2009, one month before the US recession officially ended. An April 2010 letter is titled: “The US Stock Market is Trading at Bubble Valuations”; including dividends, the S&P 500 has almost tripled since then.

Hero to zero

The problem is that investors tend to forget that getting one thing right doesn’t mean you will get the next thing right. Meredith Whitney’s accurate analysis of US banking woes meant she went from being a “Wall Street backbencher” to the “most influential stock analyst in America”,

Fortune

magazine said in 2008. Her firm, Oppenheimer, charged clients $100,000 for an hour of Whitney’s time. In 2009, she set up her own firm and launched a hedge fund in 2013.

However, Whitney went from hero to zero in 2010, getting it badly wrong when she predicted US municipal bond defaults would result in losses totalling "hundreds of billions of dollars". Her hedge fund closed in 2015. Once dubbed an "oracle" by Michael Lewis, Whitney's high-profile status is long gone. Bearish fund manager Dr John Hussman suffered a similar fall from grace. Investors flocked to Hussman's Strategic Growth Fund in the aftermath of the banking crash, with assets swelling to $6.7 billion by 2010. However, Hussman's predictions of further carnage over the last nine years haven't panned out. His aforementioned fund has more than halved in value and investors have fled, with assets under management falling to just $300 million. A host of others who called the global financial crisis – hedge fund managers such as Odey and Hugh Hendry, controversial commentator Marc "Dr Doom" Faber, AND George Soros's one-time partner Jim Rogers – have endured a much tougher time over the last number of years, remaining too pessimistic for too long. After the financial crash, there was a huge appetite for commentary from analysts once dismissed as permabears. Bob Janjuah was famously pessimistic – "even I get depressed reading his stuff", Société Générale's notorious permabear Albert Edwards once joked – but he was "courted by half a dozen investment banks" after he decided to leave RBS in 2010, the New York Times reported at the time. Edwards became similarly fashionable for a time, although investors who heeded their bearish predictions over the last nine years have left a lot of money on the table. Many other sceptics don't deserve the permabear label. Grantham, for example, turned bullish before stocks bottomed in March 2009, advising investors to "reinvest when terrified". However, Grantham turned cautious on stocks too early, wrongly underweighting US stocks as early as 2010.

Hedge fund manager Paulson rightly went from bearish to bullish on bank stocks in 2009 but a few disastrous bets saw his Advantage Plus fund more than halve in 2011, and recent years have not been good ones for his investors. David Rosenberg turned bullish in 2013, but the US bull market was four years old at that stage. Roubini, too, missed the market turn in March 2009. Additionally, its worth asking: how exactly do you define "being right"? "Peter Schiff was right", a YouTube video cataloguing US money manager Peter Schiff's doom-laden forecasts, became popular after the banking crash. However, while Schiff rightly predicted US stock market carnage in 2008, many of his other calls fared badly.

In January 2009, the Wall Street Journal reported that one of Schiff's investors, an 83-year-old retiree, had seen his account collapse in value from $100,000 to $37,000. Schiff "goes around saying that he was right", the retiree told the Journal. "He was right about one thing and wrong about everything else."

Bad idea

A quick glance at some old headlines will remind investors that it’s not a good idea to buy into a narrative on the basis that someone once successfully forecasted a single event. “Bitcoin Will Hit $400,000: Analyst Who Predicted Its Surge”, reads one headline from last December, just before the cryptocurrency peaked and crashed. “Analyst who predicted Trump says Le Pen will win French election”, headlined

Business Insider

last April, a fortnight before Emmanuel Macron coasted to victory.

"Stock Market: Investor Who Saw Bubble Predicts Market Crash", headlined Fortune magazine last year, referring to the aforementioned John Hussman (the headline made no reference to the fact that Hussman had been wrong over the previous eight years). "The crash will come some day and the people who have been complaining about rigged markets will feel vindicated," says Ben Carlson, of Ritholtz Wealth Management. "They will take victory laps and hand out I-told-you-so's to anyone who will listen. But they also won't help you get back in the market because there will always be another reason to stay out."