Every forecast takes a number from today and multiplies it by a story about tomorrow.
Investment valuations, economic outlooks, political forecasts – they all follow that formula. Something we know multiplied by a story we like.
The trick when forecasting is realizing that’s what you’re doing.
A few weeks before he died a reporter asked Franklin Roosevelt if the Yalta Conference negotiations near the end of World War II set the stage for permanent peace in Europe.
“I can answer that question if you can tell me who your descendants will be in the year 2057,” Roosevelt said. “We can look as far ahead as humanity believes in this sort of thing.”
The deals hammered out in Yalta were the things we knew. How long they’d hold, how much they’d be adhered to, and what else could get in their way is just a story people told and believed in varying degrees.
Anything that tries to forecast what people will do next work like that.
The hard thing is that while the number we know today can be something real and verified, the story we multiply it by is driven by what you want to believe will happen or what makes the most sense. Forecasters get into trouble when the number we know from today gives an impression that you’re being objective and data-driven when the story about tomorrow is so subject to opinion.
When valuing a company, revenue/cash flow/profits is the number we know. The earnings multiple you attach to that figure is just a story about future growth.
Same with economic trends. We have lots of data, but none of it means much until you attach a story to it about what you think it means and what you think people will do with it next.
That seems
