Next to my desk in the imposing FT Alphaville headquarters in Oslo*, I have the above cartoon pinned to the wall to remind me to try and keep things in perspective.
I don’t remember where I first discovered it, but it stuck with me. Financial journalists tend to get carried away from time to time, and I’m no exception (OK, I’m probably worse than most). But it is a vast phenomenon.
The severity of the global financial crisis left deep emotional and intellectual scars in all who lived through it. Since then, many people have been desperate to identify the next big economic fault line, the next CDO, the next financial cataclysm that will befall us. Some permabears have managed to turn their apocalyptic visions into lucrative careers.
But it’s not just the usual mix of doom-mongers. Everyone seems convinced that we live in particularly turbulent times. Bank of America’s monthly survey of investors’ greatest extreme risk offers an excellent list of the various things that have scared us off over the past decade.
What’s remarkable about this is how many things have practically happened.
The euro zone held on, but barely, and the economic and financial costs of the crisis were heavy. China’s housing bubble burst, Trump won a US election and violently contested another, a short flight imploded, and more. And yet none of them ended up being a true era-defining 2008-style disaster, despite the warnings they might.
Many people will simply point the finger at central banks and their hyper-aggressive stimulus measures as to why none of them have really derailed the global economy (or only temporarily in the case of Covid ).
It’s true that low rates have helped ease a lot of tension, although that always seemed like a lame excuse to me, like saying someone would have died of cancer if they hadn’t had chemotherapy. . Sure, maybe, but that’s exactly why we use these tools. I find it hard to see how rates were “artificially low” any more than they were “artificially high” in the 1980s.
But I think there’s a better and actually more enlightening explanation: Crises like 2008 are thankfully rare, and we should stop judging every financial storm by its magnitude. Normal recessions happen. The markets can vomit without being the end of the world. Things break, but rarely permanently.
Dan Loeb’s latest letter to investors was therefore interesting. While acknowledging a “gloomy outlook”, he pointed out that markets tend to bottom when economic data looks “awful”, and said he was increasing his risk taking. Not because a recession will be averted, but simply because it is unlikely to be the economic carnage some imagine today.
I know about this catastrophic trap because I fell into it too, stating in a March 10, 2009 letter to investors that we should “prepare for the impact” just before the markets (and our portfolio, since I changed my mind). my opinion a few days later based on new data and had increased its exposures to banks/autos) reversed dramatically. The key question for me at this point is whether rate capitulation and Fed policy-induced inflation is the key or whether a dip in the real economy (based on unemployment, incomes, industrial spending and general measures of GDP) is actually what matters most.
For now, while remaining respectful of the many well-flagged risks, we seek to deploy capital both in world-class companies that are trading at favorable prices and in event situations that will be somewhat insulated from the movements of the market.
Markets have been looking a bit more perky lately thanks to the growing belief that central banks are about to slow their rate hikes – and in some cases suspend them. I’m not going to list everything that could turn things around because we might as well list everything that would make things even worse. And for a financial journalist, part of the job is to be a bit garish and tend towards pessimism rather than optimism.
The Michael Ramirez cartoon, for example, apparently appeared in the April 7, 2008 edition of Investor’s Business Daily. Ironically, financial journalists were right to be a bit panicked at the time! The US recession had only recently begun, and by the end of the year it would become one of the deepest and most widespread global economic setbacks in history.
Maybe by hyperventilating everything that could possibly go wrong, maybe financial journalists can, in a very small way, prevent them from doing so? I may just be a blinkered financial reporter trying to weave a desperate narrative around the value of my own profession, but I think there are legitimate reasons for a bit of fearmongering (in moderation).
Yet I think the broader and more important lesson is that most of the time things are going well. Not always wonderfully, and there are always people who end up losing (tragically, though, it often seems like the same groups of people are losing).
Right now we are probably witnessing an economic downturn. But given the financial health of households, there is no reason for it not to be lenient. Inflation will subside, central banks will reverse course, and a new economic expansion and bull market will begin. Things will probably be. . . good?
* Basically a broom closet in my basement