One of the fun things about the World Economic Forum in Davos, Switzerland, is that you can just hang out in a lounge and wait for interesting people to wander by.
Some of the interesting people who wander by are billionaires.
One of the billionaires who wandered by yesterday made an interesting observation about the stock market’s effect on the real economy.
Specifically, he said:
Tanking stock prices are going to scare CEOs and make them more cautious. Instead of dreaming big dreams and plotting world domination, these CEOs are going to go into self-preservation and cost-cutting mode. And then they will start firing people.
The people who are fired, of course, will have less money to spend. That lack of spending power will mean less revenue and less growth for companies. And less revenue and growth will make the CEOs of these companies even more cautious, which will make them cut more costs and fire more people.
And so on.
In other words, tanking stock prices will cause economic weakness, rather than just reacting to it.
The same effect happens in reverse, by the way. When stock prices are skyrocketing, CEOs feel giddy and rich. They stop thinking about cost cutting and start thinking about world domination. They start hiring people and spending more.
Another billionaire, George Soros, wrote a book about this phenomenon. He calls it “reflexivity.”
In any event…
The consensus among billionaires and other pundits at Davos is that this stock-market correction is going to be just a correction, not a full-blown bear market. And the consensus is that there will be an economic slowdown, but not a recession.
Another thing George Soros has said, of course, is that the consensus is always wrong.
If we assume that George Soros is right and today’s consensus is wrong, the question is which way the consensus will be wrong…
If we had to bet — which, thankfully, we don’t — we’d take the “under.” We think the risk of a recession is growing by the day.
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