Recession 2007? Improbable? Totally unpredictable? So why are most economists predicting it won't happen? And can you trust anything you read in the news about a coming recession? One trader says it's just "noise." You decide:

"To be competent, a journalist should view matters like a historian, and play down the value of the information he is providing," writes trader, math professor and epistemologist, Nassim Nicholas Taleb, author of the just released bestseller, "The Black Swan: The Impact of the Highly Improbable," and his earlier "Fooled by Randomness," which Fortune calls "one of the smartest books of all time."

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Taleb says breaking news is just "noise." And to avoid distracting the public, a "competent" journalist should qualify all comments. For example: "Today the market went up, but this information is not too relevant as it emanates mostly from [random] noise."

However, he's quick to warn "competent" journalists against taking his advice, because "he would certainly lose his job by trivializing the value of the information in his hands. Not only is it difficult for the journalist to think like a historian, but it is, alas, the historian who is becoming more like a journalist." So, he's trapped journalists in a classic double bind: If we strive to be competent and successful, we're hypocritical too.

So my problem's thinking like a historian? Maybe. I am more concerned about our long-term lazy portfolios, and am skeptically about short-term trading (influenced by the classic Odean/Barber studies proving "the more you trade, the less you earn.").

Can economists ever predict the unpredictable?

So, let's try being "competent" with a couple examples. Headline: "Dow hits another new record 13,300!" Impressive? Yes, if you focus narrowly on today, the short-term. Stats tell us one-year returns are over 15 percent, average three-year returns about 13 percent, although 5-year and 10-year averages drop to 8 percent.

But "competence" demands a broader historical context. After the manic 1990s market, the DJIA peaked at 11,722 in early 2000, then crashed to 7,286, while investors lost $8 trillion market cap. Seven years later Main Street investors have received a peak-to-peak return of about 230 points a year, merely 2 percent annually — disappointing folks who got in near that last top. Consider the broader historical reality:

Top structured-finance traders in Wall Street's investment bankers earned 2006 bonuses in the range of $10 million to $15 million. Top executives in America's 500 blue chips made an average of $14.8 million in 2006, up from $10.7 million the prior year. The top 25 hedge fund managers made an average of $570 million each in 2006, with three getting over $1 billion. Yet, although the economy doubled on a per capita basis the past three decades, the average earnings of a male actually declined while the average female's earnings increased slightly.

Taleb's experience as an options trader and mathematician leave him with little faith in breaking news. As he noted in "Randomness:" "If there is anything better than noise in the mass of 'urgent' breaking news pounding at us, it would be like finding a needle in the haystack." The problem with this "information is not that it is diverting ... but that it is toxic ... too statistically insignificant for the derivation of any meaningful conclusion."

And yet, paradoxically, he loves breaking news for personal reasons: News drives world markets. As "insignificant" and "toxic" as breaking news may be, the absurdity of irrational investors driving irrational markets keeps traders like him happy:

"I currently look at it with delight. I am happy to see such mass-scale idiotic decision-making, prone to overreaction in their post-perusal investment orders. In other words, I currently see in the fact that people read such material as insurance for my continuing in the entertaining business of option trading against the fools of randomness."

And nothing will change, because "it takes a huge investment in introspection to learn that the 30 or more hours spent 'studying' the news last month neither had any predictive ability during your activities of that month nor did it impact your current knowledge of the world." So traders take advantage of these "fools" lacking introspection.

'Blind leading the blind' in improbable markets

If breaking news is useless, if journalists are borderline incompetent, will anything satisfy Taleb? His new book, "The Black Swan," targets rare, highly improbable events, such as 9/11 and Google's success, events some may call acts of God, missing links, even miracles. They have three defining characteristics:

The event is highly improbable and unpredictable It will have "massive consequences" And, afterwards, experts will invent reasons why it was predictable not random.

Try testing this one: Economist Gary Shilling is a classic contrarian, often predicting the unpredictable. Like a 2007 recession. Most economists disagree, although the consensus acknowledges a slowdown.

So a recession is improbable and unpredictable to most optimistic economists employed by governments and banks. And a recession is close to an "unpredictable" event. It would have massive consequences. And afterwards those same economists will appear on CNBC to explain why they actually did predict it beforehand.

Review Shilling's pregame scenario. Is Shilling's recession the next "Black Swan?" And are all the other economists (and journalists) just smoking toxic happy talk, distracting the public from preparing their portfolios and family budgets for the coming recession? Shilling sees the subprime market as the burning fuse that'll ignite an explosion, push the economy into recession:

Stockholders earlier believed housing was "safe, until interest rates skyrocketed, but then came deflation in subprimes, the soft extrusion of the housing bubble." "Now stockholders and most economists continue to believe subprime mortgage woes won't sink the rest of housing and the economy." They even ignore "leaping subprime problems as teaser rates reset and the spreading difficulties" infecting Alt-A (lesser risk) mortgages. As the contagion spreads, "lenders retrench and are pressured by regulators and the likely downgrades by rating agencies." Next comes "the capitulation of housing speculators." Add to that "procrastinating homeowners as the spring selling season bombs" and prices drop further. Creating an "immense housing inventory overhang" of 2 million homes. Meanwhile, "hopes that capital spending will replace housing as a growth engine have also faded." "Foreign economic growth won't be a replacement." And "rapid U.S. job growth won't offset faltering housing" ... Because historically "residential activity falls before business cycles peak." Next, the "declining construction employment and spending spread to the rest of the economy and overall jobs." Finally, Shilling expects a 25 percent fall in house prices that "will mushroom these negative effects" as America's problems drag the world economy into a recession.

But is Shilling's recession a true "Black Swan" if he "sees" it? Or is Shilling just as incapable as every other economist of predicting an improbable event?

That's Taleb's point. Anything that's a real "Black Swan" is totally improbable, you can't see it let alone predict it. So journalists are just generating more noise that'll continue distracting all those happy-talking economists and misleading all those irrational "fools of randomness" who keep options traders like Taleb in business, getting more than a little rich.

Copyright (c) 2007 MarketWatch, Inc.

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