On Wall Street, as in all places, the truth will set you free. The opposite may be occurring. The un-truth may be trapping us. I'm hearing almost universal consensus on two theories that strike me as possibly fallacious:
- The economy is hitting a soft patch.
- If economic data continue to weaken, the Federal Reserve will have to act.
White House Economic Advisor Austan Goolsbee, on weekend news/talk shows, was less than charming in his strident assertion that the economy was merely experiencing a “few bumps.” (We reckon that “soft patch” may have been a little too strong for Mr. Goolsbee.)
His performance reminded me of the scene in “Animal House” when the officious ROTC student shrieked to the stampeding mob, “Remain Calm! All is well!” Indeed talking heads across the universe of cable channels are insisting that the current economic weakness is JUST a “soft patch.”
As I found out yesterday during my CNBC appearance, woe betide he who suggests otherwise.
Here's the point: in my over twenty years as a professional investor, whenever the herd becomes insistent on any isolated possibility, it is urgent that one consider other possibilities.
I am not saying that we will have a second recession but that in order to be responsible stewards of clients' funds, we are honor-bound to consider all outcomes: both more and less dire. Yet, Wall Street seemingly will have none of it. This is worrisome.
As to point number 2, this is a recent phenomenon. It is stunning how investor's and consumer's expectations have become so embedded in the theory that the Federal Reserve's role is to prevent economic weakness.
Periods of economic expansion and contraction are almost tidal with wax regularly giving over to wane.
Alan Greenspan memorably kept interest rates at or below 2% for three years following the dot-com bubble of the late 1990's.
While a more severe decline was likely avoided, additional bubbles in real estate and credit were born.