I see it every December and January: in the flurry of economic and political forecasts, someone says we ought to “expect a surprise.”
Phrases like this drive the writer part of me crazy. A surprise, by definition, is something you don’t expect, so telling us to expect one makes no sense. They might as well say, “Expect the warm water to be cold.” The words don’t go together that way.
The analyst part of me, though, knows what they really mean: not that we should expect a particular unforeseeable event, but that we should recognize the probability that we will be surprised in some way, at some point.
In fact, that prediction is almost always realized. I can guarantee you’ll get surprised this year. I can’t guarantee what specific events will surprise you, but I can make some educated guesses, as I did last week in “Economicus Terra Incognita.” Today we’ll go a step further and look at some of the “surprises” others are seeing in their crystal balls.
We can acknowledge the difficulty of making forecasts while also learning from informed speculation. How to do this? Pay attention to people who know their limitations. The most useful forecasts come from well-informed analysts who understand the very real boundaries that guide speculation about the future. One of my favorite Clint Eastwood lines, which I often quote to my children and friends, is the familiar, “A man has to know his limitations.”
Last week we discussed the limitations of forecasting. Condensed into one paragraph, my forecast said that world GDP will continue to decline, while the US will have slow growth – closer to 1% than 2% – but we shouldn’t plunge into recession without a shot across the bow to the US economic system from overseas. I speculated that such a shock might come from the collapse of Europe, a true crisis in China (beyond falling to 3–4% growth), or an uncharacteristically severe bear market in stocks. In the past, bear markets have not caused recessions – the causality is the other way around. But in the past, the US economy was not sputtering along at stall speed, so I don’t think we can rule out causation running the other way. All my other forecasts follow from those basic thoughts, which you can read if you like.
So today we’ll look at 2016 forecasts from some professionals I trust. I know most of them personally and have been friends with some of them for years. I know they aren’t just “talking their book.” They may turn out to be wrong, but if so, it will be for the right reasons. After we review the forecasts, we’ll look at some common threads among them, as well as important differences.
I should also note that some of the following material isn’t normally available to the public. My friends either sell it at very high prices or share it only with their well-heeled clients. They let me publish it for two reasons.
First, they know I will present their opinions fairly and respectfully, even if I disagree.
Second, they know my readers are intelligent folks with whom they might form fruitful business relationships. So if you see promising connections, I urge you to contact them and explore the potential. Now, on with the show.
BCA: Stuck In A Rut
The venerable Bank Credit Analyst traditionally begins each year by transcribing a conversation with longtime (and possibly mythical) subscriber, “Mr. X,” who shows up in their offices very concerned and full of questions. Strangely, Mr. X always seems to reflect my own concerns, so I look forward eagerly to the BCA new year’s issue. Former editor and now chief economist Martin Barnes and his team endeavor to lay Mr. X’s concerns to rest. I have been reading the Bank Credit Analyst for 25 years.
Much of what I learned early on about the markets I gleaned by reading and talking with Martin Barnes. The ring of authority and certainty in his deep Scottish brogue weaves a spell, making you want to believe that the world is as Martin sees it. That things often turn out the way Martin expects comes as no surprise. Some of my favorite personal moments have come sipping scotch with Martin late at night at Leen’s Lodge, Grand Lake Stream, Maine, gazing at the stars as we vigorously contend over the minutiae of economics. And if I ever become particularly confused, I have the privilege of being able to pick up the phone and call Martin, who will at least talk me off the ledge. However, I digress.
On this year’s visit, Mr. X is mightily concerned that extreme central bank monetary policies are creating major economic and financial distortions. He sees a risk-filled environment and wonders if he should cut his equity exposure. (Note: BCA’s letter was published in December, before this year’s market fall.)
This year, BCA says Mr. X is right to be concerned. The team believes the sluggish economic recovery stems from structural rather than cyclical factors. In BCA’s view, the “debt supercycle” (a concept they developed multiple decades ago) is now ending in a very slow turn that could take another decade or more to complete. We are not dealing with a normal balance-sheet recession and recovery. Modest income growth is constraining demand, which in turn constrains debt reduction.