Uncertainty is the only safe prediction

This is the summer of uncertainty. Chief executives, money managers, analysts and central bankers are preoccupied by how little they know. With more tumult in the eurozone ahead, the US racing towards a “fiscal cliff” and China slowing down, conventional wisdom in the financial world says the future is especially unknowable right now. If you have lousy returns, blame uncertainty.

The uncertainty consensus is flattering: it implies our age is uniquely on edge. But it offers no useful insight. Investors who wait for resolution will be the investors who waited too long.

Evidence of the financial world’s epistemic turn is not hard to find. Companies as varied as Cargill, the world’s biggest agricultural commodities trader; CBRE Group, the commercial real estate firm; Legg Mason, the fund manager; and Kraft Foods all lament economic uncertainty in their recent reporting. Often they say uncertainty is “heightened” to emphasise the current state of doubt.

Some companies have tried to outline the duration or magnitude of uncertainty. Cooper, a tyre company, “expects uncertainty to persist in the global economic environment” through 2012, though it’s not so certain about uncertainty in 2013. The chief executive of earthmoving equipment maker Caterpillar this week told the Financial Times: “There’s never been a more unpredictable set of tea leaves than right now.” The meme has even crept into the Federal Reserve. Minutes of its monetary policy meeting released on Wednesday showed its members believed economic uncertainty had given consumers and investors pause. Some acknowledged “an unusually high level of uncertainty” had blurred their own outlooks.

Empirical proof of uncertainty is lacking, however. The US consumer sentiment index is sharply higher than a year ago and retail sales have strengthened, hardly signs of Americans paralysed by anxiety.

Companies are not hoarding money. Among non-financial companies in the S&P 500 stock index, growth in cash on corporate balance sheets has slowed below 10 per cent a year for the first time since late 2008 as companies boosted dividends or bought back stock, according to S&P Capital IQ.

The S&P 500 this week hit the highest level since May 2008. The Vix index, which tracks market expectations of future stock volatility, has declined. Meanwhile, fixed-income investors are vacuuming up higher-risk junk corporate and municipal bonds.

Gold jumped above $1,670 a troy ounce but the catalyst was the Fed signalling more stimulus, not uncertainty. And metals boosters are conflicted over the meaning of uncertainty. The World Gold Council industry group attributes a decline in gold demand in the second quarter “to the particularly challenging global economic climate and market uncertainty”. But a report from a leading issuer of gold-backed funds reads: “Precious Metals in Demand as Macro Uncertainty Soars”.

There are doubtless plenty of risks to be unsure about. First is the future of the eurozone as wrangling begins anew over aid to Greece. Second is the US. If lawmakers allow tax rises and budget cuts to occur as scheduled on January 1 – the so-called “fiscal cliff” – the US could fall into recession. Third is the gathering slowdown in China.

But these are, as former US defence secretary Donald Rumsfeld liked to say, the “known unknowns”. The risk of bad outcomes is presumably priced into assets.

Of greater concern are risks no one has contemplated. But these concerns are true to every age, not just ours. Indeed, investors could have used a little more uncertainty in the past decade as they bought trashy mortgage-backed securities. Interesting fact: FT archives show 2,877 stories with the word “uncertainty” in 2005 before the subprime bubble burst. Less than nine months into 2012, the story count was 3,290. Which year will prove more critical for markets?

The question cannot be answered. Uncertainty is the foundation of financial markets, the source of risk and opportunity. It is not an abnormality worth dwelling upon. As the philosopher Ludwig Wittgenstein wrote in his book On Certainty: “Doubt gradually loses its sense.”

gregory.meyer@ft.com