Why Bearish Forecasts are Meaningless

The FT has an interview with UBS CEO Peter Wuffli today, in which he intones gravely about the dangers facing credit markets:

Mr Wuffli is also keenly aware rosy conditions will not go on indefinitely: “What is not here to stay is the absence of default, the absence of inflation over a longer period of time, and of essentially flat yield and credit curves,” he says.

The Wuffli comes in the wake of Steven Rattner's equally grave op-ed in the WSJ:

To think that corporate recessions -- and the attendant collateral damage of bankruptcies among overextended companies -- have been outlawed would be as foolhardy as believing that mortgages should be issued to home buyers with no down payments and no verification of financial status.

All of which is perfectly sensible. But I have to ask, who are these people of whom Rattner speaks so disparagingly when he says that "the current ahistorical performance of high-yield markets has led seers and prognosticators to proclaim yet another new paradigm"? Are there really people so enamored with the idea of a Great Moderation that they believe that defaults are a thing of the past?

The markets these days seem to be full of eminence grise types who mutter darkly about how all this modern spread tightening can't go on for ever, you know. (Bill Rhodes of Citigroup has been doing it pretty much all decade long.) But of course if you're a pundit, it's much easier to be a bear than a bull. If the market tanks, a bull is proved wrong immediately. But if it goes up, bears just nod sagely and say "just you wait". Eventually, of course, they're proved right – although it's worth noting that even at the bottom of the dot-com stock-market crash, prices were still well above their levels when Alan Greenspan gave his famous "irrational exuberance" speech.

What I'd dearly love to see from some of these people is something they'll never provide: call it falsifiability, in a nod to Karl Popper. Ask yourself if there's any conceivable state of affairs which would prove these people wrong. If the answer's no, then frankly their warnings are pretty meaningless.