The late Ted Geisel, author of the Dr. Suess books, was the subject of a recent conference at the New York Law School. As reported in the New Yorker, the purpose was to explore the similarity between Geisel's books and the current impasse in Washington. He uses implausible facts to create a plausible world. Geisel created unlikely circumstances and improbable characters that were knitted together in a story that had a message. For example, in "Horton Hears a Who," we are introduced to unlikely characters and events until we arrive in the end with, "A person's a person, no matter how small ..."
The opposing forces of economic and financial predictions struck me as similar to Dr. Suess in the sense that each side conjures up what, to some, would be implausible evidence to arrive at what that cherry-picked evidence would suggest as a plausible result.
For example, David Stockman in the New York Times outlined a bleak future for America (if not the entire world) because of the amount of government debt outstanding. He concludes in the end that "the United States is broke -- fiscally, morally, intellectually -- and the Fed has incited a global currency war. ...When the latest bubble pops, there will be nothing to stop the collapse." Stockman is better known for quitting as President Reagan's budget director over disagreements at the time about the president's "deficits don't matter" mentality.
Then there's Mortimer Zuckerman in the Wall Street Journal, who calls the economy's current strength "an illusion." All of his measurements use 2007 as the starting point, but why would anyone start with a previous high level that was the result of a bubble economy? The 2007 high economic level had been driven by two wars, no increase in taxes to pay for them, a huge infusion of borrowed money and weakened banking regulations. Does anyone really think we should have had a normal quick recovery and a return to that inflated, artificial high-water mark? Stockman and Zuckerman sort through improbable facts to arrive at what, for them, amounts to a plausible expectation of a bleak future.
Meanwhile, growth ranging from 1.5 percent to 2.4 percent over the last three years sounds fine to me under the circumstances. While the Federal Reserve is blamed for its efforts to keep interest rates low, a major reason for low rates is the huge supply of cash sitting on the sidelines in corporate and personal accounts. Other countries, like France, whose banking systems are not expanding the money supply, are also enjoying the same low interest rates. What the Fed does is making only a marginal difference.
The stock market is up because the economy is, in fact, doing well. Corporations make more money today than they did in 2007. In fact, during the collapse of 2008, American companies were actually more profitable than they had been in 2007. Thanks partially to all the hand-wringing about the economy (see above), today's stock prices have been held down by the "wall of worry." Price-earnings ratios are lower today than they were in 2007, so for the stock market optimists, there is a rationale for even higher values.
At some point, people and corporations sitting on all that cash losing 2 percent per year to inflation will throw in the towel. For companies this means that they will use the cash to buy back their stock or spend money in anticipation of increased demand for their products. What it means for individuals is that they will see a reason to finally tip-toe back into the market after having watched it rise 150 percent from its nadir four years ago.
Getting back to Dr. Seuss, what passes for economic predictions is often nothing more than thinly disguised politics. People hoping for a crisis that would reflect badly on a president they weren't fond of have been disappointed at the lack of soaring interest rates they predicted. A rising stock market and a dramatic increase in home prices have also been thorns in their paws. But that doesn't stop them from persisting at their implausible facts and hoping for their plausible outcome.
To be fair, the optimists could be just as wrong. An unprecedented worldwide collapse of the banking system could someday leave these folks wishing that their selection of "improbable facts" had offered a little more protection on the downside. But what all this says is that individual investors need to set politics aside when it comes to managing money. Just look at the historic results of different asset classes and assume that past long-term results will repeat themselves over time. Anything short of that is betting against history.
Stephen J. Butler is CEO of Pension Dynamics. Contact him at 925-956-0506 or email@example.com.