Publications

- February 1, 2019: Vol. 6, Number 2

The truth would set us all free: Recession is inevitable, and so is uncertainty, and that is the problem

by Mike Consol

A former boss once told me, “People can deal with the truth; what they cannot deal with is uncertainty.” That kind of transparency made for a better workplace. Economic uncertainty isn’t easy to deal with either. Unfortunately, business leaders and investors live professional lives of constant uncertainty — more today than ever. Since the near-cataclysmic global financial crisis ended, there has been more than the usual uncertainty. It isn’t just the knowledge that recessions are inevitable, albeit unpredictable; it’s the specter that something is rotten at the core of our economic system. Perhaps it’s the unremitting growth of public and private debt. Perhaps it is people’s loss of faith in society’s organizing institutions.

It didn’t help when the stock market suddenly started convulsing in the final weeks of 2018 and turned what looked to be a big year into a more than 10 percent loss for the Dow Jones Industrial Average. It doesn’t help that China’s giant economy has turned sluggish, or that major U.S public companies are warning about slowing revenue and earnings growth. Add to that uncertainty about trade conflicts with China, and concerns that, in the end, it could become a self-inflicted gunshot wound to an economy that had started to roar, after being goosed by U.S. tax cuts and the unwinding of regulatory red tape.

Many have complained Trump administration tax cuts were ill-timed, supercharging — maybe even overheating — an already strong economy, rather than using them as a key tool for helping mitigate or even staving off the next recession. Now, with budget deficits and the national debt rising fast, yet another round of tax cuts isn’t practical.

Let’s face it, this longest-ever economic recovery and growth cycle has frustrated many with its modesty, and it has had the entire business community on tenterhooks, still shell-shocked from the severity of the most recent downturn, which nearly brought global economic order to the breaking point. The investors and investment managers associated with this magazine and its six sister titles published by Institutional Real Estate, Inc., have summed it up this way: “Things are going well, but we aren’t having any fun.”

Something foreboding is in the air. The lynchpin of recessions never seems to come from an expected place. We assess what doomed the economy last time, then follow those indicators to ensure they don’t start flashing red.

I remember watching an economist present a deck of PowerPoint slides with arrays of economic statistics that, he said, showed none of the indicators that triggered the previous recession were in the danger zone. Thus, he crowed, the economy would be strong for the foreseeable future. Well before his next forecast one year later, the global financial crisis had hit with magnum force, leveling the economy. This economist didn’t talk about — and likely wasn’t aware of — the financial instruments known as derivatives, or at least not the depth, insidiousness and multiplier effect they had in creating catastrophic losses for otherwise healthy organizations. To the economist’s credit, he came back on schedule and said, “Boy, did I get things wrong last time,” launching into an analysis of what felled the economy and why virtually every economic specialist was blind to it.

There is always a person or two who does get it right, predicting the fall’s timing and cause, and they are quickly ordained as sages and featured ebulliently on the cover of Fortune. Good luck getting that right a second time when the sheer number and complexity of economic components and financial instruments obscure the dynamics at play.

As we fret, let’s remember the good news, that we have a track record as a resilient economy, one that has repeatedly shown it can take severe body blows, get off the canvas and continue fighting the good fight. We survived the Great Depression and have since become an infinitely wealthier and more innovative economy than in those dreadful days from 1929 through 1939. We learned from those times, and those lessons resulted in the creation of protective financial institutions, including The Fed, that act quickly to ameliorate the brutality and duration of recessions.

But we would all feel more comfortable and enjoy the good times with more zest, if only economists were able to identify when and how the next recession would land. I’ll paraphrase my former boss, who likely would have said, we can deal with the truth, but the uncertainty is killing us.

 

Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.

 

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