Photo: Phil Scoville via Flickr
As you scan the landscape of pundits and economists these days, it seems as if there are only two options: Implode in a fiery economic inferno or come roaring back like economies of yore.
Just remember one thing: Economists are often spectacularly wrong.
I’ve found that if you hear too much chatter about one thing, it’s more likely that the opposite will happen. How many times has the economy threaded the needle of non-expectancy, just as Nassim Taleb outlined in his now-famous book, The Black Swan.
So if you are to expect the non-expectation, what do most people expect? It seems that there are several camps getting attention right now:
Camp #1: Frothing-mouthed supply-siders often featured on Larry Kudlow’s CNBC show (and who have so frequently been wrong), who say the economy will come roaring back! America will return to the power of the days of yore!
Camp #2: Doom and Gloomers. The world economy is imploding! China will collapse and we’ll choke on a sea of debt, making the Great Depression and Mad Max look like a vacation.
Camp #3 Hyperinflationary Doom & Gloomers: Things are so bad, Keynesian government officials will make terrible mistakes printing money turning America, and perhaps other global econmomies, into new Weimar Republics.
Camp #4 Keynesian Dogmatists: We must print money like no tomorrow otherwise we’ll see Mad Max IV — beyond the ObamaDome.
But is there a more moderate camp? It seems to me that the raving commentators on TV are lined up at such opposite extremes, there is some kind of Black Swan “hole” in the scenarios that’s largely missed: What if the economy just muddles along, and nothing really happens? The “Japan Scenario.”
This is an idea promulgated by Pimco — which seems to have superior information, analysis, and power than any other major institutional firm on earth. Funny how Pimco’s Total Return fund has outperformed 90% of the universe. Half of its employees appear to be ex-Federal Reserve officials. Do they know something we don’t? Of course they do. There’s a reason why Bill Gross has several spectacular houses.
Pimco’s CEO El-Erian has set out a cogent and well-researched “New Normal” thesis, which implies neither a complete implosion nor a standard recovery but merely lackluster growth. The New Normal theory makes a lot of sense to me, if only because so many people think it won’t happen.
Yes, there are huge risks in the economy, mostly weighted down by gigantic problems at large global banks. But the world’s central banks seem on battling these damaged balance sheets by printing money, which could have the effect of preventing outright deflation, but weighing down future growth with government debt and monetary burdens.
So it’s possible for a more muted “economic disaster” scenario — think, the 1970s. In this case, it’s an opportunity. You will see high-quality stocks in single-digit P/Es. This “New Normal” environment — which is a soft economy but not a terrible depression — also leaves room for the best companies to accel, and the crappy companies to get cleaned out.
What does this mean for investors? The way to proceed is 1) On market selloffs, buy high quality stocks with low valuations with a long time horizon 2) Hedge against potential inflation with moderate positions in commodities and precious metals.
Personally, this is the scenario I’m rooting for. It seems we have more pain to take to pay for the excesses of the last 20 years. It seems unrealistic to suspect another “roaring 1990s.” But I’m just hoping we don’t get the kind of pain that rips apart the fabric of society. I’ve seen Mad Max many times already.
This guest post was previously published on The Rayno Report
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