The Men Who Got It Right

On the 1 January 1962, The Beatles spent just under an hour auditioning for Mike Smith, a producer at Decca Records at their studios in West Hampstead, North London. They performed 15 songs chosen by their manager, Brian Epstein, designed to showcase several Lennon/McCartney originals along with assorted cover versions they had performed live in a number of venues over the years.

In what is considered one of the biggest mistakes ever made in history, Decca Records rejected The Beatles, several weeks later, on the basis that “guitar groups are on the way out”. Decca therefore compounded a hideous commercial error with a notoriously inaccurate prediction.

It is easy to laugh, with the pleasure of hindsight, at the numerous terrible predictions made throughout history. What is more difficult is to recognise and applaud the tiny minority of forecasters that got it right, sometimes repeatedly so. History’s most famous example is Winston Churchill, who warned as early as 1932 of the acute dangers of allowing Germany to rearm. In response to Neville Chamberlain’s infamous 1938 Munich prediction that it was “peace in our time”, Churchill responded to him bluntly: “You were given the choice between war and dishonour. You chose dishonour and you will have war.”

Only two wise men accurately predicted the Credit Crunch and the inevitable ensuing recession.

Nassim Nicholas Taleb, the cult author of Fooled by Randomness and The Black Swan, scathingly attacked the risk-management models used in the financial world and beyond, in his books. He argued that these models took no account of “Black Swans” - rare, high impact events, known in quantitative finance as “fat tails”.

In The Black Swan, Taleb wrote, “The government-sponsored institution Fannie Mae, when I look at the risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup.” Globalization, he noted, “creates interlocking fragility.” He warned that while the growth of giant banks gives the appearance of stability, in reality it increases the risk of a systemic collapse – “when one fails, they all fail.”

On October 14, 2008, Bloomberg announced that investors advised by Taleb had gained 50% or more this year as his strategies for navigating big swings in share prices paid off amid the worst stock market in seven decades. In an interview, on the same day, Taleb said, “I am very sad to be vindicated. I don’t care about the money. I’m proud I protected my investors.” Taleb also said that the current crisis was a “White Swan” not a “Black Swan” because it was something bound to happen.

Even more remarkable, were the uncannily accurate predictions of Fred Harrison, a Director of Economic Indicator Services (UK). Harrison began his career as an investigative reporter and comprehensively studied economic patterns over the previous 400 years. In 1983, he published The Power of Land which reviewed detailed historical evidence for four countries: the USA, Japan, UK and Australia. He was drawn to a chilling conclusion. The boom and bust business cycle repeated itself every 18 years. This meant that if the patterns of history were to continue, the global economy that had recovered from the slump in 1974 would survive for 18 years before “tail-spinning into yet another deep-seated depression of even greater magnitude”.

In his compelling book, Boom Bust, published in 2005, Harrison wrote: “The lessons of history appeared stark and inevitable to me: a global slump in 1992. In April 1983, I submitted warning memoranda to the UK Treasury, and alerted the public in an economic bulletin. The mandarins in Whitehall were not willing to listen. Neither was Margaret Thatcher’s Tory party. In 1996, I repeated that warning for the benefit of Tony Blair’s party. The warning was also ignored by the shadow Chancellor of the Exchequer, Gordon Brown.”

In Boom Bust, Harrison accurately predicted that house prices would peak in August 2007 when the peak ratio of house prices to earning would be 6.5. He forecast that this would be followed by massive slump in house prices, an unparalleled crisis in the financial markets culminating in a bitter depression in 2010. However, not all is lost; the housing market will peak again in 2025.