History is No Longer an Accurate Guide to the Future
We have become accustomed to presuming that what has happened in the past will give us a good idea of what may happen in the future, whether in determining insurance premiums, stock market movements, or the outcome of political referendums. That is changing, however. As has become evident in so many ways over the past two decades, we can no longer count on historical performance to serve as a guidepost to the future.
One need look no further than the outcome of the Brexit vote or the Colombian peace referendum to see how spectacularly the pollsters and bookies got it wrong.
While UK voters were almost universally expected to reject Brexit, and Colombian voters — longing for peace after a half century of war — were naturally expected to embrace the recently signed peace agreement with the FARC, they did exactly the opposite. Is that the result of outdated polling methods? Is it a failure to truly understand the pulse and intention of voters? Or have voters around the world become so fickle and unpredictable that accurately predicting election outcomes is no longer possible?
Something similar may be said about historical U.S. economic performance, which would suggest that the U.S. has been due for a recession for some time. According to the National Bureau of Economic Research, which has tracked recessions on a monthly since 1854, between 1854 to 1919, there were 16 economic cycles, the average recession lasted 22 months, and the average economic expansion was 27 months. From 1919 to 1945, there were 6 cycles, recessions lasted an average of 18 months and expansions for 35 months. And the period from 1945 to 2001 saw 10 cycles, recessions lasted an average 10 months, and expansions an average of 57 months. So recessions got shorter and expansion periods longer over time.
Since the third quarter of 2009, the U.S. economy has expanded every quarter but one (in 2014) and is poised to continue the trend through the final quarter of 2016 (though growth has been anemic all year). Given that the U.S. economy is once again the de facto engine of the global economy (given China’s slowdown), far outpacing Europe and most other developed economies, there would appear to be little reason to believe that there are two consecutive quarters of negative growth or real GDP in the near term future (which would constitute the beginning of a recession). On this basis, current U.S. economic performance is blowing statistics for the past 170 years out of the water, with 83 months of post-recession growth.
Then, of course, there is the U.S. presidential election, which has shattered so many preconceptions of ‘normality.’ As recently as the 2012 election cycle, day wasn’t night and down was not up. Is that merely the result of the Trump Train? Has anything really changed so fundamentally in four years that demagoguery, bigotry, and small mindedness have captured the imagination of half of the American people? Or had those traits never truly disappeared, and so many of the pollsters, political pundits and talking heads have simply never gotten it quite right?
One would have thought that dual Obama presidencies would have signaled a shift away from some of the uglier aspects of American history. Then again, American voters have exhibited a propensity to vacillate between Left and Right, Liberalism and Conservatism, and isolationism versus interventionism. We need look no further than the transition from George W. Bush to Barack Obama to see that. If one were to simply rely on recent political history, a Trump presidency would appear to be a foregone conclusion, and a Clinton presidency would be yet another slap in the face of history.
As these examples illustrate, there is great danger in presuming that what has happened in the past is necessarily any indication of what will happen in the future. This has as much to do with globalization as instant communication. But it also has something to do with voters who were previously either shut out or not heard (for whatever reason) having become integrated into the political process. It is the result of a change in global economic dynamics, with a gradual transition away from developed country domination of the global economy in favor of emerging economies. And it is evidence that technology, innovation and creativity, which are so vibrant in the U.S. economy, are translating into extended economic gains that literally swim against the tide of history.
So to all those ‘know-it-alls’ who think they’ve got it all figured out, you just don’t. Those political pundits who proclaim every day that they know the outcome of the U.S. presidential election, those stock market prognosticators who swear to their brethren that they know the future movement of stocks or the market, and those global leaders who honestly believe that they are in tune with the pulse of their people – you are probably wrong. Historical performance is no longer a reliable guide to the future. The sooner we all admit that, the better off we will be.