07 Oct Foggy Economics*
Where are those neat crystal ball predictions that students of economics used to rely on? Why is it that so many of today’s analysts, historians and financial industry pundits – including the Federal Reserve – are getting their forecasts so, so wrong? What makes predicting the economy in the 21st Century so different, so challenging? What is creating the fog? Where can a person look for answers to threshold economic questions? Is the U.S. headed towards a recession or is it not? Opinions and analyses vary. (See “1937” in the March 11th TLR and “The Coming Recession” in the July 17th TLR.) Are interest rates and fiscal policy too loose or too tight? The experts’ facetious answer to both is “yes.” (See “Managing the Economic Cycle (Parts 1 and 2)” in the May 8th and May 10th TLR.) Is the Dollar excessively strong or too weak? President Trump says it’s too strong … while his Federal Reserve Chairman disagrees. (See “A Weaker US Dollar?” in the August 26th TLR and “Be Careful What You Wish For” in the July 19th TLR.) Are we facing deflation or inflation? Perhaps both! (See “Whither Inflation?” in the March 13th TLR and “Deflation?” in the June 19th TLR.) Will the stock market continue its upward climb or is it about to fall off a cliff? Statistics support both views. (See “A Perpetual Bull Market” in the March 3rd TLR and “Is This Time the Same?” in the August 21st TLR.) What did Ray Dalio mean when he said that the U.S. is about to experience a “paradigm shift”? What might happen next? (See “There’s Something’s Happening Here” in the July 26th TLR.)
The startling fact is that, because these times are different, so very different, there are no good answers. Although historians preach that “Times are never really different” …, this time they’re wrong. Proof of that lies in another truism: “Never say never.” There is no historical precedent for the confluence of trends, changes, and multiple Revolutions shaping the world in 2019. We live in a disrupted time.
Consider the facts.
The modern Agricultural Revolution began 500 years ago … and, even now, progress continues apace. Changes to farming methods, seed technology and fertilizers may seem incremental …, but because of them, there no longer need be hunger. Agricultural scarcity has come to an end. That’s a human first.
The Industrial Revolution began in the 18th Century … and productivity continues to make huge strides year-over-year. The world now produces everything that people want …, and can produce far more. There is a true, flexible global economy. That’s a human first …, an economic and social disrupter.
The Energy Revolution also began in the 18th Century … and continues leaping from wood to coal to hydro and steam to whale oil to petroleum and natural gas to nuclear to solar and wind … and so on. Energy can be generated at levels never before imagined …, and this has created both economic prosperity and potentially-catastrophic environmental complications difficulties. The world is warming, climates are threatened, over-fishing is changing the ecology, species are dying out at increasing rates, forests are burning. The extent and pervasiveness of these changes are human history firsts.
The Technology Revolution began in the mid-20th Century … and productivity has accelerated in every year since then. We’ve barely begun seeing the changes that technology will bring to human life …, and human lifestyle. Technological change has been and will continue to be unpredictable disruptive.
Nothing has prepared humanity for the Data Revolution – free, universal, almost instantaneous access to all of human knowledge –, and for the ability of governments to control distort filter channel that access. Big Brother indeed is watching! “Disruptive” doesn’t begin to describe the Data Revolution.
The Biotechnology Revolution began only recently. Its effects on quality-of-life, medical care, and lifespan have only begun to be imagined realized. Biotechnology perhaps will be the greatest disrupter.
One can parse each of these Revolutionary advances, slicing and dicing them in any number of ways, but the result in 2019 is that they are not merely co-existing, which would portend enormous change, but in combination are synergistic … in unforeseeable ways. That is why no period in human history resembles today. That is why crystal balls are foggy …, and why they are likely to remain foggy. These times are different, impossibly different from previous periods, foretelling consequences that no one reasonably can predict, economically, socially, politically or otherwise.
But that’s not all.
At no time in history have interest rates been so low for so long. Or has there been a time when Central Banks have printed such unimaginable quantities of fiat currencies. Or even an analogous time when such fiscal expansionism has had such a seemingly small impact on economies and economics. There is no period-precedent for today’s economic conditions …, for negative interest rates – where institutions pay sovereign governments for the privilege of loaning money to those governments … or where governments (like Argentina) which consistently have defaulted on their debt obligations can issue 100-year debt instruments. Yes, these economic times also are unique different.
The world’s demographics have changed as well. Populations have exploded (largely based on the Revolutions in agriculture, medicine and technology). There are far, far, far fewer people working in agriculture and far, far, far more living an urban lifestyle. (See “The Big Blue Cities” in the July 22nd TLR.) This has radically altered the workforce, the ages of workers, and the nature of marketable skill-sets. It’s created more leisure time (with industries to match), permanently altered family structures, and shaped an enormous middle class. People today therefore behave differently from their ancestors …, those self-same ancestors to whom economists look for precedent. Human nature hasn’t changed, but human society has. And now there’s social media …, which is having an enormous effect on human behavior, on politics, on information, on prejudices, on … everything. These times are different.
Financial markets move to the beat of human behavior …, and human behavior has changed. Markets also are driven by the types and quantities of investment opportunities. Those too have changed … radically. Financial instruments of every type have proliferated, from derivatives to ETFs to almost instantaneous global market access … coupled with access to virtually unlimited data. The markets today therefore are different, very different, from the markets of yesterday … and the day before yesterday … and the day after tomorrow. The markets are in an almost constant state of disruption.
And yet economists and analysts and historians and pundits look to their crystal balls to predict the future based on what has happened in the past. That’s because history shows that patterns persist and repeat. Economic booms and busts run in cycles. They do. Those cycles are based on human nature and human nature hasn’t changed. It hasn’t. Human nature dictates human behavior and human behavior drives markets and economic cycles. That helps in forecasting trends and predicting eventual outcomes. But these times are different.
Times have changed because the world is in a period of unprecedented disruption, and the resulting changes are altering human behavior. What those changes have created can be described as fog, fog that leads to unreliable economic projections, foggy analyst forecasts, and lots and lots of mistaken market calls.
There are any number of unforeseen collateral consequences. For example, in April, less than six months ago, President Trump said “our country is full,” making the point that America doesn’t want or need immigrants and that reducing or eliminating immigration will result in more manufacturing jobs going to ranks of unemployed factory workers, thereby boosting manufacturing and nativist American job creation …, all part of his America First strategy. (See “Our Country is Full” in the April 22nd TLR.) That now has changed. Already. This past Friday’s jobs report saw America’s unemployment rate drop to a 50-year low(!) and manufacturing activity hit a 10-year low(!). There are no manufacturing jobs that Americans haven’t already filled. America’s economy no longer is a manufacturing-driven one. Times have changed. Today’s America has more jobs than workers. It needs more workers to fill the jobs that America is creating. And there aren’t enough Americans who can fill those jobs.
These times are different.
That times have changed was one of the points in Ray Dalio’s July 17th opus, “Paradigm Shifts” (addressed in the July 24th TLR). After contrasting previous economic cycles, Dalio concluded that America/the world is about to experience a paradigm change. That’s because times are different … and, as a consequence, we have foggy crystal balls that are of little help in discerning the future.
Finally (from a good friend)
*┬® Copyright 2019 by William Natbony. All rights reserved.