The key point is that while the major advanced economies are currently doing more or less OK, they’re doing so thanks to very low interest rates by historical standards. That’s not a critique of central bankers. All indications are that for whatever reason—probably low population growth and weak productivity performance—our economies need those low, low rates to achieve anything like full employment. And this in turn means that it would be a terrible, recession-creating mistake to “normalize” rates by raising them to historical levels.
But given that rates are already so low when things are pretty good, it will be hard for central bankers to mount an effective response if and when something not so good happens. What if something goes wrong in China, or a second Iranian revolution disrupts oil supplies, or it turns out that tech stocks really are in a 1999ish bubble? Or what if Bitcoin actually starts to have some systemic importance before everyone realizes it’s nonsense?
(https://www.nytimes.com/2018/01/01/opinion/can-the-economy-keep-calm-and-carry-on.html)
That was from Krugman’s January 1 New York Times column, and his assessment is not far from my own view. I wrote the previous day that the economy is pretty good and will likely remain so until something makes it change course. Like Krugman, I don’t know when that will happen, or exactly how, but I’m sure it will.
The difference between us is that Krugman has made a remarkable turnaround since the imminent doom he predicted right after the election. In fairness, he utters a little mea culpa in this column, admitting that he let his political feelings distort his economic judgment. So I’m glad to welcome his Damascene conversion. I hope it sticks this time.
Rosenberg: ‘Pretty Late In The Game’
I don’t know any economic forecaster more prolific than David Rosenberg is. I don’t know how he even finds time to sleep, frankly. His Breakfast with Dave is often the same length as my weekly letters, and he writes it every working day.
Dave’s December 29 letter was a tour de force on world markets, which I can’t possibly summarize and do any justice to the original, so I’ll cut straight to his conclusion.
In other words, expect a year where volatility re-emerges as an investable theme, after spending much of 2017 so dormant that you have to go back to the mid-1960s to find the last annual period of such an eerie calm – look for some mean reversion on this file in the coming year. This actually would be a good thing in terms of opening up some buying opportunities, but taking advantage of these opportunities will require having some dry powder on hand.
In terms of our highest conviction calls, given that we are coming off the 101 month anniversary of this economic cycle, the third longest ever and almost double what is normal, it is safe to say that we are pretty late in the game. The question is just how late. We did some research looking at an array of market and macro variables and concluded that we are about 90 percent through, which means we are somewhere past the 7th inning stretch in baseball parlance but not yet at the bottom of the 9th. The high-conviction message here is that we have entered a phase of the cycle in which one should be very mindful of risk, bolstering the quality of the portfolio, and focusing on strong balance sheets, minimal refinancing risk and companies with high earnings visibility and predictability, and low correlations to U.S. GDP. In other words, the exact opposite of how to be positioned in the early innings of the cycle where it is perfectly appropriate to be extremely pro-cyclical.