Early this year many pundits confidently predicted that the US dollar would continue to decline as it has in recent months against foreign currencies like the Euro. This would raise the specter of inflation. Then it seems out of nowhere we have a new term that it’s on everyone’s lips “sovereign debt”. Overnight, with the problems in Greece the US dollar is soaring against the Euro.
This has led to another change. Since the middle of last year you could pretty much predict that when the US dollar rose, the market would decline and vice versa. That relationship has decoupled over the last few weeks and as the dollar rises, so are US stocks.
Why didn’t someone predict all of this? Where are those confident pundits now? The truth is, the world economy is more complex than we can possibly imagine. You have billions of people making billions of decisions each day. The future just is not knowable. Don’t get me wrong. There is value in doing economic forecasts, as it gives us an idea of what might happen. But too often people bet the farm based upon those predictions. Doing things like putting all their money in leveraged real estate in 2005 or oil futures in 2008 or gold today. The key phrase of that last sentence is “all their money”, not the specific investments listed.
The lesson is a familiar one. We should do two very important things. First, don’t put all our eggs in one basket. Yes, some very smart people are making those predictions, but those are educated guesses, nothing more. So we need to diversify. It’s hard to imagine, but maybe that confident sounding guy on CNBC will be dead wrong. Second, ask which would have made us more money? Real estate in 2005 and oil in 2008 or oil in 2005 and real estate in 2008? Buy stuff when it’s cheap. If the pundits are right, they may help us by letting us know what’s going to go down and down. And that’s what we’ll want to buy. The out of favor investment that will come back into favor a few years down the road.
Expect the unexpected, and you won’t be surprised or worried as much when the “It could never happen” scenario happens for the fourth time this year.