23rd December 2011

So in this spirit, here's two Mindful Money predictions following a year when no one foresaw anything that turned out really important – the Arab uprisings, the Japanese natural disasters, the English riots, euro difficulties so prolonged we risk "Groundhog Day"-style crisis fatigue, the Occupy protests, or even the death of North Korean boss Kim Jon-Il.

Randomly generated forecasts stand as much chance of being right as the thoughts of top economists. During the 1990s, a Scottish Sunday newspaper ran a New Year "Portfolio with a Pin". The writer used his blindfolded children to stab a list of shares. The results over one year were usually good, sometimes excellent and only once poor.

'Disconnect' – the new buzz word?

More concretely, 2012 will be the year when "disconnect" starts to come into the daily vocabulary.

There is a disconnect between people and politics shown in the lack of interest in parliament and low voting turnouts. There is a disconnect between people and finance – investment banker bonuses for success and failure are just the tip of the iceberg. There is a disconnect between government and markets with the latter seemingly taking control.

And there is even a disconnect between financial market participants and what's on their screens.  Is one explanation of the spate of so-called "rogue traders" and their enormous losses the possibility that young male traders think they are playing a video game instead of using other people's money? 

For investors, part of the disconnect has been the enormous power of credit markets as debt replaces the financing of growth through risk instruments such as equities at the forefront of decision making.  So bonds have replaced shares at the heart of the financial process.

Either the disconnect gets worse in 2012 or there is the start of a movement to restore markets and banks to their previous place as the servants of government and peoples rather than their masters.  But as the disconnect is still in its infancy, no one ought to bet on a swift return to that seemingly innocent world of a generation ago.

In a recent paper, Manchester University's Centre for Research on Socio-Cultural Change maintains that "financial reform is blocked because the crisis has strengthened elite power within governing structures and because democratic disconnects have disempowered the critics of finance in civil society."  The paper is a follow-up to the authors' The Great Complacence" published in September 2011.

… more of the same or change?

Their argument can be boiled down to investors having to choose between more of the same and change.

The academics are not convinced by the Vickers banking reforms.  They describe them as "wholly inadequate", and note they were welcomed by bankers and by all political parties including the Labour opposition "who should be representing the critics of finance."

They argue that the "financial crisis has paradoxically strengthened a reactionary assemblage of unaccountable elite power in the UK and that effective banking reform will be postponed until some means is found of linking programmatic action with widespread civil society discontent that is publicly represented by the Occupy movement."

Effectively, the fear of change in the wake of the financial crisis has given the bankers a stronger, not a weaker, hand.  Government and wider society have been co-opted by the City. The question is how long this disconnect can last especially when the opposition Labour party "is an obstacle to mobilisation (and change) partly because it own roots in civil society are almost non-existent."

It is impossible to forecast whether change will occur or if the UK will see a series of groundhog days where "radical financial reform is unthinkable because political elites have not changed their pre-2007 principles about the priority of shareholder value and minimal public control of financial markets and banking structures."

On a lighter note, why does anyone make predictions which are likely to fail? There are a number of explanations.  Either forecasters are masochists, revelling in the reviling that will come.  Or they are willing to take a high risk, high potential return bet in the remote chance they are right and can profit from this.

Or that they reckon they can draw from their prediction whatever goes right while ignoring the mistakes – rather like theatres which extract the "amazing" from a review which reads more fully "it's amazing that any director over the age of 12 could possibly have staged this pathetically juvenile garbage."

Was Goldman Sachs right when it predicted a 4 to 5% rise in the Dow Jones Index in 2011? On a year on year basis it's up some 500 points to just over 12,000 – bang in line with the Goldman suggestion.  But the bank missed out forecasting a peak 12,876 as well as the 2011 nadir of 10,404.  Still, not bad for crystal ball gazing.

In 2011, most got the rise of gold right but elsewhere it was a mixed bag with many over-optimistic on UK
equities (which had a depressing year).

"Millionaires don't use astrology; billionaires do!"

Would astrology be better?  Super banker J. P. Morgan was reputed to have said:  "Millionaires don't use astrology; billionaires do!" But there is no proof he ever said that   – the quotation can only be dated back to California's San Jose Mercury News in May 3, 1988, long after his death in 1913.

But if you go down this route, you might need to prepare your portfolio for the end of the world.

The Mayan calendar predicts the apocalypse some time in the next twelve months. But if it were to come to pass, there would be nothing anyone – investor or not – could do about it.


More from Mindful Money:

5 Trends: Can futurists help investors pick the winners of 2012?

Alternative investments ideas for 2012

What are 2012's most exciting investment sectors?

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