The Impossible Art of Prophecy
Written by Paul Siluch
January 2nd,2024
I don't make mistakes. I make prophecies which immediately turn out to be wrong.
- Murray Walker
Around 700 B.C. in ancient Greece, a temple dedicated to Apollo became famous for its priestess. She was known as the Oracle of Delphi and her words of prophecy came to be sought out by kings and scholars.
The title of Oracle was passed down from one woman to the next, with the requirement that she be a virgin over the age of 50.
At least, she had to look like a virgin. Appearances were very important in the prophesizing world.
Biblical Archaeological Society
The oracle’s pronouncements were delivered in a delirious state and were often gibberish. These words were then studied by priests and interpreted as enigmatic prophecies. History suggests oracles did not live long lives, for reasons that only became apparent thousands of years later.
Archaeological excavations done in the 1980s at the temple site discovered subterranean cracks leading down through the earth to petrochemical seams. Ethylene gas permeated up the fissures beneath the temple, especially in the warmer months of summer, when the oracle made most of her predictions.
Small amounts of ethylene “can cause both benign trances and euphoric psychedelic experiences, physical detachment, loss of inhibitions, the relieving of pain, and rapidly changing moods without dulling consciousness.” (Henry R. Spiller, toxicologist).
Hence, the delirium and gibberish. Despite the euphoria, inhaling ethylene is decidedly bad for your health, which may have led to the short lifespans of the Oracles of Delphi.
In 1555 - two thousand years later - the philosopher Nostradamus stared into a bowl full of water and herbs for an entire night before composing his prophecies. He was careful to obscure the details by using verse and languages such as Greek, Italian, Latin and Provencal to craft his 942 predictive verses.
He was lucky with several of his predictions, such as his forecast of the death of Henry II from a jousting accident. This made him famous and the favourite of royalty.
Modern supporters believe Nostradamus also foresaw the Great Fire of London, the French Revolution, the rise of Napoleon and of Adolf Hitler, both world wars, and the nuclear destruction of Hiroshima and Nagasaki. His prophecies were obscure enough that you can find almost anything you want to find in them.
The recipe for the herbs Nostradamus inhaled remains a mystery. We can’t rule out ethylene.
The Future is Now
As 2023 turns over to 2024, we find ourselves looking back on our victories and mistakes, as well as wondering what will happen in 2024. New Year’s is when analysts, economists, and assorted armchair newsletter writers (like me) feverishly write down what they think might happen in the year ahead.
Looking back, 2023 was an unexpected year, in terms of returns. 2022 was awful, so we began with most people bearish. What happened? Stocks had their best return in years. The U.S. economy ended up growing about 2.4% in 2023, which is pretty good for an economy that Bloomberg Economics’ model gave a 100% chance of a recession last January.
Forecasting is a tough business (data from Financial Samurai):
| Wall Street Consensus Forecast | Actual S&P 500 Result | |
| 2021 | +7% | +27% |
| 2022 | +9% | -19% |
| 2023 | +7% | +24% |
Our biggest regret was not committing more money at the end of October. We had been waiting for a decline in markets all year and, just as we were getting close to the point where conditions were washed out, markets turned upwards sharply in November and never looked back.
And that 100% chance of recession call? You can forgive Bloomberg for being wrong: interest rates were marching higher by the month. People with 2% loans and mortgages were squeezed brutally as their rates reset to as high as 7%.
The U.S. Leading Economic Indicator (LEI) has never fallen to -4 without the country falling into recession, and yet we hit -8 and have remained below -4 all year and still avoided a contraction.
What else surprised us last year?
Technology stocks. Spending fell on computers and cellphones, and China was restricted from using U.S. chips. Valuations were at nosebleed levels. And yet, technology stocks had their best year since 1999 (Nasdaq was +54%).
“Prediction is very difficult, especially about the future.”
- Yogi Berra
To be clear, despite all our best efforts, predictions are largely useless. The historic track record of economists and strategists correctly predicting the stock market is just 48%, which is slightly worse than monkeys throwing darts at a dartboard.
Why is it So Hard?
I had a doctor client once who wondered why his results never improved. He claimed to be a better surgeon now than 10 years ago – why wasn’t he a better investor?
Heisenberg postulated in his Uncertainty Principle that you can never accurately determine the position of an electron because looking at it moves it.
Of course, you have to look at something to see where it is. Weather is similar in that our efforts to control and measure it end up changing it.
Financial markets, sub-atomic physics, and weather are called dynamic complex systems where the participant affects the outcome.
When you act on stocks – buying or selling – you move them, even if just a little. This means markets are constantly adjusted by human behaviour. How would medicine be different if the human body moved its organs around every day? Would we survive if operations were successful just 48% of the time?
Unforeseen events make predictions even more complicated. For example, who foresaw these surprises?
2016: Trump Presidency
2020: Covid 19
2021: $4 trillion stimulus AFTER we had a vaccine (and the promise of no inflation)
2022: Russia/Ukraine war
2023: Artificial Intelligence breakthrough, Israel/Gaza war
Why Do It?
The secret to successful prediction is how the Oracle of Delphi and Nostradamus did it:
- Make your predictions confusing, broad, and vague.
- Make a lot of them.
- Inhale something hallucinogenic.
Hallucinogenics notwithstanding, the act of thinking about the future can help us prepare by thinking about what could happen.
So, here we go - our thoughts for the year ahead:
- 2024 should be moderately positive. When November and December of a year are strong, the following year has been positive every year this has happened since 1954.
Also, the U.S. Presidential cycle data shown below, which dates back to 1900. The 4th year of a presidential term typically starts down and ends up, with a positive year overall:
Most analysts see U.S. markets rising only ~1% next year. This is quite a negative stance. When the majority expect returns below 5%, returns are usually 5% or better (Warren Pies Research).
We could slump in the first quarter before rising (see chart above), followed by interest rate cuts starting in March that could help push stocks higher.
- The economy sputters. Do we finally fall into recession? Maybe, but a shallow one. 47% of Canadian mortgages have reset to higher rates (TD Bank), and these people have had to slow their spending. The remaining 53% come due over the next two years, and this will slow spending even further. So, a slowdown or shallow recession.
Falling interest rates will help blunt a giant wave of foreclosures, so I don’t think we are going to see a wave of mortgage defaults – banks and governments will find ways (lower rates, longer amortizations) to keep people in their homes.
But office buildings are another matter. Many offices remain empty today due to Work from Home policies that are now an accepted option. Office buildings in the U.S. are selling for half or less of their values from 7-8 years ago. This could be a troubled sector for years to come.
- Inflation comes down further – for now. The official inflation target is 2% and we are now at 3.1%, down from 8%. This doesn’t mean eggs are getting cheaper (deflation), just more expensive more slowly. What happens in 2025? Wage hikes show no signs of slowing, nor does deficit spending. 2024 should be okay, however.
- The war in Ukraine affects the world less. Whether through stalemate or peace, the events in Ukraine are increasingly built into prices and will have less and less impact on oil and markets. The Israel/Gaza mess is another matter. I expect this conflict to expand and get worse. It is a wildcard for 2024.
Defense stocks will do well, sadly.
- Oil prices go up, but less than oil bulls hope for. Some are expecting $120 oil this year due to shrinking supplies. Yes, demand continues to climb, but this ignores expanding production from sanctioned nations (Iran’s output has tripled) and our ability to get more and more out of existing oilfields. At $72 today, we may average $80-85 this year with a possible trip into the $60’s during the year. $80 is a very profitable level for Canadian energy stocks, as they can make excellent profits at this level. We still love Suncor (TSX SU) stock at today’s price.
Long-term? India uses 1/3 the oil per capita that China does. They want air conditioning, refrigeration, computers, and transportation just as much as we do. India is expected to close the gap with China by 2027 (Business Examiner), so oil demand will continue to rise.
- Uranium approaches its 2008 highs. We are a very energy hungry species. The coal era was supposed to be over, and yet we used more coal in 2023 than ever, just as we used more oil, natural gas, and renewables. As we add new computers, AI searches, and space launches in every country, our demand for energy from every source will only grow. The green movement now embraces nuclear power as clean fuel. Shuttered reactors are being switched back on.
- Interest rates – the bank rate set by the government - will decline, but bond prices have already anticipated much of this move. Now, we have a bit of an expectations gap: markets expect 6-7 cuts (taking T-Bills from 5% now to about 3.5% by year-end) but the Fed has only talked about 3 cuts. Who is right – the Fed or the market? For now, we are locking in 5% rates wherever we can.
While not an issue for 2024, our growing debt is definitely a concern for future years. In 2023, gross interest on the U.S. accumulated debt exceeded that spent on National Defense (Monthly Treasury Statement). Canada is no better. Our government interest bill was $20 billion in 2020 – it’s now $68 billion (Fraser Institute). We spend $44 billion on defense, which is way behind our soaring interest bill.
- Reversion to the Mean. What did best falters, and what did worst strengthens. We may see it happen between technology and healthcare stocks.
The Magnificent 7 stocks (Nvidia, Microsoft, Meta, Google, Apple, Amazon, Netflix) were the stars of 2023. Artificial Intelligence is a very big deal, but it may take a decade to realize. This group may not fall but it most certainly cools off in 2024.
Meanwhile, many drug stocks and medical instrument companies had terrible returns in 2023. Is it because we suddenly got healthier? Hardly. Interest rate rises hurt this group, as well as everyone focusing on the two companies that produce weight loss drugs. I expect this entire industry to improve next year.
Some areas of technology will continue to experience rapid growth. Cyber security, for example. Raymond James has had three of our sub-suppliers hacked this year. None were critical and nothing touched us, but we know they are spending millions to harden their firewalls. Raymond James has some of the best cyber-security in the industry already and we continue to spend heavily to keep it this way.
- Driverless cars become more mainstream. Already approved for limited taxi service in San Francisco, Google’s Waymo driverless cars are used every day there. We will see them approved in many more cities.
- Wood stocks recover. You can’t turn on the news these days without hearing a story of expensive housing or a new government program to build more homes. What are most residential homes made of? Wood. Where have we seen mill closures and shrinking supplies due to fires? The forest industry. What investment is most affected by rising rates? Residential homes.
RBS’s analyst expects “governments will address the supply gap and reduce obstacles in the way of new housing, while lower interest rates in the second half of the year will help improve affordability.”
The forest stocks are cheap, and we have our eye on all of them.
Let’s finish on an optimistic note and think of what could go right this year.
- Artificial Intelligence could enhance productivity sooner than expected.
- The world could come to its senses and wars subside.
- Interest rates could drop to manageable levels and stay there.
Here comes 2024 – we’re jumping right in with both feet.
Paul Siluch
for
Dividend Value Partners
