What does Marks think of the current bull market and economic expansion? It seems pretty clear “we’re in the 8th inning,” but there is “no set number of innings. It could go 11 or 14.”
One vexing phenomenon is that the further a cycle goes, the more “people talk about it going longer.” Ever since the U.S. economy began a long recovery in 1982, the two business and equity cycles have been extended, with only three recessions and bear markets (some think the 1987 bear market was an aberrant accident) in the last 36 years.
Born in a period of “unusually depressed levels,” the current cycle remains a source of mystery. “People were traumatized by the financial crisis in ways they hadn’t been in the dot.com [bubble] and other recessions,” Marks says.
With average home prices falling more than 30% from their 2007 peak to September 2011, consumer spending was evidence of the degree of trauma. Moreover, the federal government had essentially taken over major parts of the financial sector, and businesses were concerned about the regulatory state expanding its reach into other sectors.
Many experts were predicting a return to recession—some even argued the Big One was coming. “Business couldn’t predict the environment,” Marks says. And there was “a president happy to regulate.”
This confluence of events left considerable pent-up demand to be unleashed. That’s one reason Marks thinks it’s possible this recovery could surprise everyone and run longer than any past expansion. “It does look like a recession will happen in 2019,” he says, and the main reason for a 2020 slowdown is “old age.”
The source of cyclicality lies in human nature, Marks believes. “People get too excited and they commit errors to the upside. When the errors become clear, they adjust to the downside,” he says.
So far in the current expansion, not that many errors of excess have been committed. Will the magnitude of the inevitable day of reckoning be nasty or nice? That will hinge partly on how long it lasts and how vigorous economic activity becomes.
Many might describe the current environment as a Goldilocks world—steady growth unlikely to spiral out of control. Marks doubts the economy can continue expanding at this ideal clip for that long. “It brings on risky behavior that jeopardizes” the state of equilibrium.
The good news is that there is no reason to think the next correction is going to be a crisis. “Not every dip is a bubble bursting,” Marks says. In the last crisis, banks were permitted to leverage themselves to 32 times their capital.