We seem all atwitter about the notion that a recession is about to happen; almost aroused by the prospect. A NASCAR crowd just waiting for a crash? Or is this a Waiting for Godot thing, as the chattering class bloviates excitedly, pointlessly and largely cluelessly? Maybe it’s the 24/7 news cycle at work… Did we run out of car crashes, shootings and natural disasters and needed something to rivet and terrify the unwashed? Or is this just politics? For obvious and entirely understandable reasons, every Democratic wannabe presidential candidate is desperately hoping a recession will arrive before the election. But to be honest, a lot of serious types motivated neither by a political gloom premium, weak ratings nor an affinity for NASCAR, seem to be talking it up as well, clinging to the recession on the doorstop narrative, no matter what (God, guns and macroeconomic theory?).
Personally, I haven’t a clue about whether we’re going to have a recession in the near term nor how bad it will be. But it’s coming; unlike Godot, I do remain certain that a recession will show up eventually. Even though our gloriously elected leaders seem to think that the power of the state is sufficient, with a new law or a couple of hearings, to fix almost anything, no one has figured out how to legislate the business cycle out of existence.
But let’s face it, the recession has not hit its mark and shown up on stage when it was supposed to in the script.
All this got me thinking about whether it’s lunatic to find my settled views about the periodicy of recessions and the business cycle confounded, while my certainty about almost everything else “I know” about the economy is largely undiminished. Uncertainty, apparently, is not contagious.
Does a misplaced recession suggest a rethink of other stuff that we view as received wisdom; all the things which we are absolutely dead certain will happen; all the As that must follow Bs? I remember lots of certainties about how the economy works from my macro class in college. (Note to self: Consider asking for a tuition rebate.) All that’s in play now?
I would submit to you that there are enough weird things happening out there right now to strongly argue it’s time for a pause and rethink. We’ve already seen many of our notions about how the economy works bludgeoned into senselessness and it’s getting late to start wondering if our certainties are still all good.
Examples? Here are some of those things which might be worthy of a rethink:
Fact: We are now experiencing the longest economic expansion ever (unless you live in Australia, of course).
And we think: A recession is right around the corner. We’ve had plenty of voices that there is a recession right around the corner for the better part of a decade.
Fact: The Great Recession of 2007 was truly horrible, destroying value, enterprises and people’s lives.
And we think: It won’t happen again. In fact, the next recession will be brief, bearable and reset the stage for further growth. All good.
Fact (dubious): There are no asset bubbles out there this time.
And we think: Consequently, the next recession will be middling as we will avoid the pernicious impact of contagion from one bursting asset bubble infecting the rest of the economy.
Fact: The banking system has plenty of capital.
And we think: The banking system will thrive during any upcoming recession and will provide liquidity to ameliorate the negative impacts of a shrinking economy and facilitate regrowth of the economy after a brief period of time.
Fact: The yield curve is inverted.
And we think: We used to think that meant a recession, now in 2.0, we think with equal conviction that the inversion is caused by extraneous global impacts and therefore can be dismissed as a recession warning. It will be different this time.
Fact: There’s $14 trillion of governmental debt around the world carrying a negative interest rate.
And we think: Low interest rates are largely good.
Fact: The US deficit is heading for $25 trillion fast.
And we think: It’s not all that bad, the government can just print money, can’t it? We even have academics now touting something call Modern Economic Theory that says that’s all fine. They’re smart people, right?
Fact: We’ve had $3 trillion of unsterilized QE and we’ve got no inflation to speak of.
And we think: Inflation is not a relevant concern over the next several years and changes in the Fed balance sheet just don’t matter.
Fact: The mandate of the Fed, the ECB, the Bank of Japan and the Bank of England is to protect us from inflation and/or grow the economy.
And we think: They all know what they’re actually doing, right?
When something breaks the pattern, when something doesn’t work as it is supposed to, we tend to view it as an isolated event. That’s probably a mistake.
What happens if a bunch of the verities go castors up? What happens if our current way of thinking about the economy can no longer predict the shape of the next downturn or provide any useful insights into the performance of the economy over the next few years?
Shouldn’t we face up to the fact that we may not have all the answers when our reality begins to stray from our preconceptions? It’s time to test alternate hypotheses and think about outcomes that might be slightly more than one standard deviation from what we have been certain is the mean (and that’s not a defense of the President’s views of Alabama and storm tracks).
If you thought that the next recession would be deeper, longer or more convulsive, what might one do in the marketplace? Keep more dry powder, begin to de-risk portfolios now recognizing that money gets left on the table? Build a capacity to thrive in a period of rapidly falling asset values? Build a hunker-down strategy to get across the chasm to the next recovery?
If we knew recessions would simply be rarer, and one’s not coming around the corner as we speak, maybe we should stop trying to talk ourselves into it? Maybe it’s time to take a deep breath and continue to grow the economy without that nagging anxiety that we’re doing something wrong.
I don’t know the answer, but these are the things that intrigue me at three o’clock in the morning and I’m afraid I’m not thinking hard enough about this reality drift. We need a view on what the economic environment is likely to look like tomorrow and the view we had yesterday may not be the view we need. This is hard, but clinging to a view increasingly at odds with our reality is just dumb. Time to retest and rethink.
