Where you stand
Following on directly from the previous column, which discussed the rally underway in the markets and what it might portend in terms of the wider picture, it is both logical and desirable to relate to the general economic outlook. Is there any improvement — and if there is, does it indicate that the recession is over, or nearly over, or at least moderating? Is there any substance to the optimism being promoted by the Obama Administration, and subscribed to by not a few private-sector economists, that a recovery might begin in late 2009?
Let me frame this issue differently: Huge volumes of economic analysis and market research issue forth from the big banks, investment companies and fund management firms – not to mention the government and quasi-government entities – as well as from small independent firms which are often based on one or two analysts. How comes that the people in the large institutions (as well, of course, as in the government) are almost always in the positive, optimistic camp, while the analysts who work for or run independent consultancies have been, and remain at the forefront of, the negative and pessimistic camp? Furthermore, as noted in this column on more than one occasion, why is it that only members of the latter group foresaw and warned about the approaching crisis, whilst almost none of the former group (yes, there was Stephen Roach of Morgan Stanley – who else?) managed that?
To say that all the really smart people work outside of the mainstream, while those working within it are not quite so smart makes no sense and is implausible. The correct answer to the conundrum is that it’s really nothing to do with being smart. Rather, it has everything to do with the dictum that ‘where you stand is where you sit’. People’s views on any issue are largely shaped by their vantage point. If you look at the world from the supposed safety and security of a large institution or government agency, you have a very strong incentive to believe that a) the crisis is inherently manageable – if the right things are done, the situation will be brought back under control; b) it is indeed being managed – the right things are being done and this response is, or soon will be, sufficient to bring things back under control; and therefore c) recovery is on the horizon. Since recovery is synonymous with regaining a measure of normality, c) is a necessary, but also sufficient, condition for peace of mind and hence optimism.
Only those people not sheltered by the apparent security of large institutions and unencumbered with the mindset that goes with working in such places, have proven able to view the world more realistically. They (or at least some of them) saw the storm gathering and issued repeated warnings, only to be dismissed and /or ridiculed. During the eighteen months after the crisis blew open in July 2007, they rejected the repeated claims that ‘the worst is behind us’ – and were repeatedly proven right. Their main mistake has been that even their worst-case scenarios have proven optimistic, forcing them to adjust their forecasts to ever-more negative levels — after their previously ‘absurd’, ‘extremist’ and ‘alarmist’ predictions had been overtaken by a reality far worse than even they had anticipated.
Currently, economic indicators are giving off mixed signals, whilst the financial markets have improved considerably. This is, by any standards, a vast improvement over the situation prevailing three months ago, when the previous bout of optimism was snuffed out by a further dose of bitter reality. It is also the least that could have been hoped for after the massive, unprecedented policy response by most governments and central banks. Can this improvement continue and build upon its own success, so that the global economy regains its balance and begins to move forward again, however hesitantly? Yes, is the answer of the pessimist/ realist camp. It could happen – but that is the less likely option. It demands too many things to come right and too few things to go wrong.
The more likely option is that the various stimuli being administered will do their job and stimulate activity – as the stock market rally of the last month would suggest. But the stimuli will wear off before they solve the problems; indeed, many fear they are creating a new set of problems. The improvement will therefore prove fleeting and will not lead to recovery. You don’t have to accept that view – it’s just that the people propounding it have been right so far, so do you want to bet that this is where they come unstuck?