What a difference a half-year makes

Following up on my last post, a good source of comedy reading this holiday season will be the various prognostications and predictions made in the past year that now seem foolish.  One could blame the prognosticators for being fools, and in some cases that’s true.  In other instances, however, it’s just what people see as rational extrapolation from the past.  Just to pick an example out of a hat, here’s what the McKinsey Global Institute wrote in June of this year: 

Four new power brokers—Asian sovereign investors, petrodollars, hedge funds, and private equity firms—are having a growing impact on global capital markets. In this update to a 2007 report, MGI examines how the new power brokers have fared since then, during the turmoil of skyrocketing oil prices, evaporating liquidity, and disappearing leverage.

MGI finds that the financial and economic events since mid-2007 have, if anything, accelerated the trends identified earlier: The power brokers’ wealth and clout have grown. They have adapted by expanding their investment strategies. And they have increased the use of private financing as an alternative to public markets. Their actions have brought clear benefits in containing the financial market crisis but also have highlighted the risks associated with their rise….

Despite the financial crisis, MGI projects that the power brokers will continue to grow in wealth and clout. Under a conservative, base–case scenario, their combined assets will grow to $21 trillion (excluding overlap between them) by 2013. If, instead, they grow more briskly, at their 2000 to 2007 pace, their wealth would rise to $31 trillion, equivalent to roughly 60 percent the expected size of global pension funds or mutual funds in 2013.

The rapid rise of the new power brokers also poses potential risks. The report examines four main concerns: that the additional liquidity might foster asset price inflation; that state investors might use their wealth for political purposes; that hedge fund failures might destabilize the financial system; and that private equity firms’ heavy leverage might increase credit defaults. MGI concludes these concerns remain on the table and justify careful consideration and monitoring. But overall, the rise of these new power brokers has been largely beneficial to global capital markets.

The possibility of hedge funds destabilizing the system certainly remains in play, but most of the rest of this looks pretty silly.  Of MGI’s four new power brokers, only Asian sovereign investors still look like their power will be growing. 

I really don’t mean to pick on McKinsey.  In fact, readers are strongly encouraged to comb through the archives of danieldrezner.com to see what I got wrong.  Here’s my prediction post from the end of last year — I only batted .500, but I do think I got the big things right.