Next to my office in the high-rise Oslo headquarters of FT Alphaville * The above animation has been pinned to the wall as a reminder to try to keep things right.
I don’t remember where I first came across it, but it made an impression. Financial journalists tend to get carried away sometimes, and I’m no exception (well, maybe worse than most people). But this is a widespread phenomenon.
The severity of the global financial crisis left deep emotional and intellectual scars on all who experienced it. Since then, many people have been desperate to pinpoint the next big economic blunder, the next CDO, the next financial disaster that will be upon us. Some centenarians have succeeded in turning their horrific visions into lucrative careers.
But this isn’t just about the usual mix of death advocates. Everyone seems convinced that we live in uniquely turbulent times. Bank of America’s monthly survey of investors’ top tail risks provides an impressive list of the different things that have freaked us out over the past decade.
What’s remarkable about this is pretty much how many things happened.
The eurozone held together, but just barely, and the economic and financial costs of the crisis were severe. China’s real estate bubble burst, Trump won one US election and violently stabbed another, the short folder exploded, and so on. However, none of them ended up being a truly 2008-style, era-defining disaster, despite warnings that it could.
Many people will simply point to central banks and their overly aggressive catalysts to explain why none of them have derailed the global economy (or only did so temporarily in the case of Covid).
It’s true that the lower rates helped relieve a lot of tension, although this always felt like a poor excuse, like saying someone would have died of cancer if they hadn’t had chemotherapy. Sure, maybe, but that’s exactly why we use these tools. I’m having a hard time figuring out how rates were more “artificially low” than they were “artificially high” in the 1980s.
But I think there is actually a better, more advanced explanation: crises like 2008 are fortunately rare, and we should stop judging every financial storm by its magnitude. Periods of natural recession happen. Markets can vomit without it being the end of the world. Things break, but rarely do they break permanently.
So Dan Loeb’s latest message to investors was interesting. While acknowledging the “bleak outlook,” he noted that markets tend to bottom out when economic data looks “disgusting,” and said he was raising his risk appetite. Not because a recession will be averted, but simply because the economic carnage some people now imagine is unlikely.
I’m aware of this death spiral trap because I fell into it too, declaring in my March 10, 2009 investor letter that we must “prepare for impact” just before the markets (and our portfolio, since I changed my view only days later based on new data and growing exposure to banks). / auto) turned around dramatically. The key question for me at this point is whether capitulation to rates and inflation driven by Fed policy is key or whether the bottom of the real economy (based on unemployment, income, industrial spending, and broad measures of GDP) is actually what matters most.
For the time being, while still respecting the many well-defined risks, we are looking to deploy capital into both world-class companies that trade at rock bottom prices and event-driven positions that will be somewhat sheltered from market movements.
Markets have been looking a bit more complicated lately thanks to a growing conviction that central banks are about to slow – and in some cases pause – their interest rate increases. I will not list everything that could turn things around because one could easily list everything that would make things worse. And for the financial journalist, part of his job is to be a little bit blunt, leaning pessimistic rather than optimistic.
The cartoon by Michael Ramirez, for example, was apparently published in the April 7, 2008 issue of Investor’s Business Daily. Ironically, the financial reporters were right to be a bit panicked at the time! The US recession has only recently begun, and by the end of the year it will become one of the largest and most extensive global economic downturns in history.
Perhaps, by overplaying all the things that could go wrong, perhaps financial journalists could in some small way help prevent them from doing so? I may just be a bumbling financial journalist trying to weave a desperate story about the value of my profession, but I think there are legitimate reasons for a bit of intimidation (in moderation).
However, I think the broader, bigger lesson is that most of the time doing things. It’s not always great, and there are always people who end up losing (but sadly, it often seems to be the same groups of people who lose).
Right now, we’re probably staring at an economic downturn. But given the financial health of families, there’s no reason not to be in moderation. Inflation will subside, central banks will reverse course and a new economic expansion and bull market will begin. Things are likely to be. . . Fine?
* Basically a broom closet in my basement