How the Davos Pundits Got It Wrong: President Clinton, Anyone?By
Predictions from 2016 show perils of assessing political risk
“I’m really looking forward to it: Trump’s humiliation”
This just in: Shortly after Hillary Clinton is sworn in as U.S. president on Friday, she’ll telephone British Prime Minister David Cameron to discuss closer ties with Europe. Other global leaders, meanwhile, will wrap up the annual meeting of the World Economic Forum in the Swiss ski resort of Davos.
Well, the last part is true. The rest isn’t fake news. Instead, it flows from predictions made at the conference in 2016, highlighting the perils of forecasting political risk, especially in an era of growing populism. While the event offers countless opportunities for crystal-ball gazing, don’t expect much confidence in the Davos crowd’s predictions.
A year ago, few of the captains of industry and princes of punditry anticipated either the election of Donald Trump in the U.S. or the success of the Brexit campaign in Britain. This year is poised to be just as topsy-turvy as last, with the Trump administration taking shape, Brexit talks commencing, and national elections in the euro area’s two largest economies.
“If you bother to read some of the serious analysis of Trump’s support, you realize that it’s a very fragile thing and highly unlikely to deliver what he needs in the crucial first phase of the primaries,” said Niall Ferguson, a senior fellow at Stanford University’s Hoover Institution.
“By the time we get to March-April, it’s all over,” Ferguson said at a panel last year co-hosted by Bloomberg. “I’m really looking forward to it: Trump’s humiliation. Bring it on.”
Almost as confident was Martin Sorrell, the chief executive officer of WPP Plc, who expressed surprise at Trump’s early successes. “It doesn’t matter who the Republicans put up,” he said. “Hillary will win.”
The year’s other big politico-seismic event, of course, was the U.K.’s decision to quit the European Union. There, too, the Davos crowd didn’t get it right. Many pundits at last year’s meeting -- Eurasia Group President Ian Bremmer, former Italian Prime Minister Mario Monti, then-French Prime Minister Manuel Valls – said Brexit was highly unlikely.
Cameron, of course, offered an optimistic view. “My aim is absolutely clear,” he said in a keynote address at the forum. “I want to secure the future of Britain in a reformed European Union.”
The attendees did a better job on economic outcomes. Last January, the U.S. Federal Reserve Bank’s projections were suggesting four interest rate increases during the year. In the end, the central bank raised borrowing costs only once, in December.
Billionaire George Soros said he would be “very surprised’’ if the Fed tightened monetary policy, while New York University economist Nouriel Roubini expressed doubt that the Fed would manage four hikes in 2016.
A year ago, China was reporting its weakest quarter of economic growth since 2009, triggering sell-offs of the yuan and China-listed equities and roiling global markets.
While Soros declared that “a hard landing is practically unavoidable” in China, much of the rest of the Davos crowd –- Credit Suisse Group AG CEO Tidjane Thiam, Institute of International Finance President Tim Adams, and Columbia University economics professor Joseph Stiglitz -- rightly predicted that China’s stumble wouldn’t last. Economists surveyed by Bloomberg peg China’s 2016 growth at 6.7 percent, only slightly down from the previous year’s 6.9 percent.
“What’s happening in China is a slowdown by all accounts,” Stiglitz said. “But it’s not a cataclysmic slowdown.”
Steve Schwarzman, co-founder of Blackstone Group LP, said China’s stock market wouldn’t enter a “free fall,” and he was right. After dropping more than 20 percent in January, the Shanghai Composite Index rebounded to finish the year down 12 percent.
China’s January sell-off was mirrored elsewhere, albeit less dramatically. The bearish sentiment prevalent as the conference got underway colored predictions of stock performance for a year that saw the Standard & Poor’s 500 Index eventually climb by almost 10 percent.
Morgan Stanley CEO James Gorman said “the violence of the correction would suggest it’s certainly not temporary,” and Scott Minerd, chief investment officer at Guggenheim Partners, said the S&P 500 would fall to 1,650 in the first quarter. Its lowest close that quarter was 1,829.
“I believe we’re seeing a dead-cat bounce,” Minerd tweeted from Davos, “and there is another 10% downside from here.”
Yup. Just ask President Clinton.
For more on Davos, see our special report on the World Economic Forum 2017.