bigideas

Being a media pundit is a job that involves an odd relationship with data, the truth and, of course, most experts’ stock in trade: the future. In this world, it seems to me, being right is one thing and not being wrong is another.

Not Being Right

Despite all the charts and equations that get tossed around, macro-economic forecasting isn’t much more sophisticated than reading tea leaves. That doesn’t stop people making a living out of predicting what will happen, though, especially in parts of the economy of particular interest to people who aren’t financial experts. In October 2003, for instance, a chap called Gavin Greenway started a web site called housepricecrash.co.uk about a severe, imminent fall in the UK housing market. (The site was sold to new media outfit Fubra in 2006).

Here’s what house prices have done since housepricecrash.co.uk has been in business, in case you haven’t been paying attention (this is the Land Registry HPI for England and Wales, based on actual transacted prices):

It would be fair to say that Greenway and his colleagues have consistently made the wrong forecast about the housing market since he got into the business. Here’s IFA and spokesman for the site Jonathan Davis, billed by Sky News as a “housing market analyst”, from some time in late summer 2007:

Davis gets lots of media gigs as an expert on the property market: he’s recently been invited to write an article for the New Statesman continuing to make more or less the same prediction that was wrong half a decade ago. On his own site, for instance, we find a quote from The Times in which he called the top of the housing market in 2004 (look at that graph again) and advised against property as an investment.

Those who enjoy Schadenfreude may like this item from TV news slot London Tonight in 2005, also provided on housepricecrash.co.uk itself, in which it’s revealed that Greenway sold his property and moved into rented accommodation, expecting to pick up a new place at a bargain price after the imminent crash (the graph! The graph!):

Property bull Kirsty Allsop appears at the end of this segment incandescent at Greenway’s project, accusing him of attempting to manipulate the market. The web site responded with a press release but the conspiracy theory lingers. (I must also mention this hilariously over-the-top site that I suppose takes Allsop’s response as a starting-point and goes all the way over the cliff).

Not Being Wrong

One might well wonder why anybody would give the time of day to the forecasts of someone with a track record like Greenway’s or Davis’s. But what I’ve talked about is the fact that they weren’t right, and I think they’re in a game that’s really about not being wrong. Domestic property is a commodities market, and such markets tend to be cyclic. So one day, Greenway and Davis will be right, because one day house prices really will come down.

I’m reminded of hedge fund manager Tony Dye, who “predicted” the dot com crash way back in 1995. In fact Dye made a living out of consistently making negative predictions, and his fortunes rose and fell in inverse correlation with the markets he was investing in. Dye was a clever operator who made much money, but he was the stopped clock of stock market speculators and his forecasts were wrong more often they were right. That’s simply because crashes are driven by panic and tend to last a short time, while booms are driven by optimism and tend to be more tentative:

Conversely, when he was right he was very right, because crashes happen fast.

When prices do turn decisively downward the housing market bears will say not only that they were right, but that they’ve been warning us this would happen for years. Until then, none of us can read the tea leaves much better than anyone else. Retrospectively one can make the obvious point, as I have just now, that certain self-styled experts have been consistently wrong, which suggests that their predictions now are worthless too, but that’s just not very interesting (thanks for getting this far).

Another important aspect of not being wrong is giving good reasons for your predictions. Property bears commonly make the point that mortgage interest rates are historically low, which is broadly true although it depends on how valid comparisons are across 30 or 40 years. They point out that household debt is at a pretty high level, and they’re sort of right. They argue that house prices are now at very high multiples of income, making getting onto the ladder very difficult for many, and there’s plenty of anecdotal evidence for that.

So when their specific predictions don’t turn out, they can more or less claim that they were right and the market was wrong; that irrational sentiment continued to drive up prices when they “should” have gone down. Which might be okay unless you took them seriously at the time, did something about it and lost a lot of money. Incidentally, Davis isn’t shy about telling people to act on his forecasts — on Radio Five recently, for instance, he advised a worried young caller to pull out of a property purchase and wait for a few years until prices had come down. If given consistently, that advice will turn out to be correct because the market is cyclic. That doesn’t make it good advice, and the indiscriminate way in which it’s given reveals the single-mindedness with which the underlying opinion is held.

Not being too specific is a good idea, too. In the Sky news clip, Davis presents these two forecasts:

• “I think there’s going to be a crash”
• “Prices will fall…. by next year I believe we’ll see a small fall and it will continue for a number of years”

Can Davis be held accountable for those specific predictions? Not easily, because they’re entirely contradictory. A crash is a sudden and dramatic fall in asset values; a “small fall” that continues “for a number of years” is certainly not the same thing. The only way Davis will be entirely wrong is if house prices go up, and even then if they don’t go up by much he can claim it’s an indicator that what he said would happen is about to happen. It’s very hard for Davis to be wrong, even if it’s impossible for him to be right (because his statements taken together are contradictory).

Being a pundit is about not being wrong. Avoid making financial decisions based on what you hear on the radio. Here endeth the lesson.