In a financial crisis where the unthinkable has seemingly become routine, Wall Street forecasters – and even the markets themselves – are struggling to get a handle on what will happen next.
"These are volatile times – there's a lot of moving parts here, and nobody can quite figure out how they all mesh," said Edward Yardeni, an investment strategist. "You're hearing a lot of catastrophic predictions."
So far, many of these forecasts, whether computer-crunched numbers or seat-of-the-pants estimates, have turned out to be wrong. But investors, struggling to make sense of one of the most severe downturns in a generation, still seem to hang on to Wall Street's every word. Forecasts that might have been dismissed a year ago are now earning serious attention and moving markets.
Some critics of forecasting say this is a dangerous trend. The events of the last year have lent credence to the case of the heretics who say that Wall Street puts too much faith in its ability to predict the future by looking at the past.
In a best-selling book, "The Black Swan," Nassim Nicholas Taleb, a former trader, criticized economists for exploiting "our desire to be fooled by a simpler representation of the world."
"I cannot find a single convincing argument that tells me that astrologers won't do better than economists," Taleb said last week by telephone from Lebanon, where he was mountain-hiking. "The problem is the arrogance of these economists. They're making people rely on theories that have not worked, do not work and are really dangerous."
Taleb pointed to the reliance of some investors on financial models, the quantitative wizardry that can churn reams of data in an instant. These were the same models that in the lead-up to the subprime mortgage meltdown, assumed that home prices would never decline on a nationwide basis in the United States. They also ran so-called stress tests on complex investments that ended up losing money when the economy went south.
But despite this decidedly mixed track record, forecasters still enjoy a rapt audience, particularly at a moment when so much in the markets depends on the uncertain course of the housing market and the broader economy.
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