Which Way?

On the impossibility of forecasting and the art of navigating uncertainty

Before asking what something is worth, ask what world you are living in

Every DCF analysis begins with one innocent assumption: that we know what the appropriate discount rate is. We take the risk-free rate, add a risk premium, write a formula, and get a number. The number looks precise. Sometimes it goes down to the cent.

But this precision is an illusion.

The discount rate is not an objective constant of nature, like the speed of light. It is a function of the macro environment we live in. A function of interest rate levels, of liquidity in the system, of capital’s appetite for risk. When the Federal Reserve expands its balance sheet and floods the system with liquidity, the market de facto accepts a lower required return from risky assets. Not because the companies became better. But because the regime shifted.

One and the same company, with one and the same cash flows, is worth fundamentally different things under different liquidity regimes. It is not a question of valuation error. It is a question of a fundamental change in the conditions under which valuation makes sense at all.

Buffett put it more simply: interest rates are gravity for assets. But gravity, it turns out, is not a constant. It changes with the regime.

Why the question “which way?” cannot be reduced to a forecast

Once you accept that valuation is conditional, the next question is unavoidable: which way is the regime heading?

And here most analysts make the mistake of answering with a forecast. They give a number, a date, a scenario. The Fed will cut rates by year-end. Liquidity will recover by Q3. The recession will arrive in 18 months.

The problem is not that forecasts are bad. The problem is that the very nature of the question makes forecasting impossible.

The market is a mechanism for aggregating expectations. The moment an expectation becomes consensus, it is already priced in. Therefore, useful information is precisely what the market does not yet know. And what the market does not know, by definition, cannot be reliably forecast.

If everyone knew which way the regime was heading, arbitrage would eliminate it instantly. The price of uncertainty is the price of the asset itself.

Keynes understood this long before most. In the General Theory he writes: “The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made.” And he is even more direct: “If we speak frankly, we have to admit that our basis of knowledge for estimating the yield ten years hence is usually very slight and often negligible.”

Investing is not an exercise in predicting the future. It is an exercise in predicting what other participants will think about the future. One layer of reflexivity that makes the forecast self-defeating.

The psychology of the forecast

Why then does everyone make forecasts? Why is the financial industry organised around them?

The answer is psychological, not analytical.

Uncertainty is painful. The brain has evolved to seek patterns, cause-and-effect relationships, and predictability. When we have no answer to the question “which way?”, we feel anxiety. A forecast, even an uncertain one, relieves that anxiety. It gives a sense of control.

The financial industry is built on this psychological need. Clients do not pay for the truth that no one knows. They pay for a confidently presented scenario, for a table of numbers, for a “fair value” down to the cent. The number is a comfort, not information.

Navigation instead of forecasting

But if forecasting is impossible, what remains? Should we simply throw up our hands and say nothing can be known?

No. The distinction is between forecasting and navigating.

A forecast says: “On date X, event Y will occur.”

Navigation says: “Under current conditions, the probability is tilted in this direction.”

This is a fundamental difference. Navigation does not claim precision. It works with probability distributions, with asymmetries, with conditional statements. You do not say “the regime will shift on this date.” You say “at current Net Fed Liquidity levels, historical correlations point toward multiple compression if the trend continues.”

The difference is enormous from a practical standpoint. Navigation allows you to position asymmetrically. Not to bet everything on one scenario, but to structure your positions so that under different outcomes you have different, yet manageable, results.

The useful question is not “which way will the market go?” The useful question is “what would have to be true for this valuation to be justified?”

When you look at the current price of an asset and ask what rate of cash flow growth is “baked in”, you learn something important: you learn what expectations the market holds. Then you assess whether those expectations are realistic against the current macro regime. You are not forecasting. You are evaluating the asymmetry.

Liquidity as a compass

In this framework, liquidity is not merely a technical metric. It is the context without which no investment decision is complete.

It describes the environment in which the market operates. When liquidity contracts, gravity intensifies. Credit spreads widen, multiples compress, risky assets lose their patrons. When liquidity expands, the reverse.

This is not a forecast. This is a description of a mechanism. The mechanism does not tell you exactly when things will happen. But it informs you of the direction of the wind. And when you know the direction of the wind, you can choose whether to sail with it or against it.

Financial markets are dynamic systems with feedback loops, not static equations. In such systems, navigation requires humility before uncertainty, not its denial.

Investing as a philosophical practice

In the end, the question “which way?” is not a question with an answer. It is a question that forces you to clarify your own assumptions.

Every time you buy or sell, you are implicitly answering it. You are saying: “I believe that under the current regime and under realistic scenarios for the future, this position has an asymmetrically favorable risk/reward ratio.” That is a navigational decision, not a forecast.

DCF remains a useful thinking tool. But it is a tool for clarifying assumptions, not an oracle. When you run a DCF and get a number, you have not found a “fair value”. You have found the answer to the question: “If the world looks like this, then this price is justified.”

Change the assumption about the regime, the number moves. Change the liquidity in the system, the number moves. Change the horizon, the number moves.

Precision is a convenience. The honest truth is that we invest under conditions of structural uncertainty, with incomplete information, in real time. The task is not to eliminate it. The task is to navigate it.

Which way? Nobody knows. But we can be honest about what we do know.

Tihomir Bachvarov | Liquidity Desk