CWP Monday Morning Digest June 11th, 2018 | Volume 23
There is an old saying in economic circles about economists in general that goes something like this: Economists are so smart and in tune with the ebbs and flows of the business cycle that they've predicted 16 of the past 12 recessions.
That's not a typo, but what qualifies as solid economic humor and self-deprecation. It's not their job to make you laugh, too, you know.
I've written before about humans and our incredible ability to see and process patterns. Unfortunately, we're so good at it that we often see patterns that aren't predictive of anything. When it comes to the financial markets and the economy, that doesn't change.
This week we start by looking at an article from Ben Carlson at A Wealth of Common Sense as he examines the data on U.S. recessions and a comment made by CNBC's Art Cashin stating that the U.S. has experienced a recession every decade:
"Since the Great Recession ended in 2009, that obviously means we haven’t had one this decade. Someone who thinks correlation implies causation in these things would assume that means we’re due for a recession in the next couple of years before the new decade hits.
I didn’t doubt Cashin’s stats but I had to dig into this one to see what the historical record shows:" ~Ben Carlson
Here's the table:
What jumps out at me is that recessions, or panics as they liked to call them back in the day, used to be incredibly severe and happened much more often then they do now. It was not uncommon for a recession to wipe out close to 25% of the economic output of our country and do it at least a couple of times per decade. That's pretty incredible.
By contrast, the "Great Recession" that happened not that long ago only reduced GDP by a little over 5%. More shocking to me, at least, was how mild the recession was following the tech bubble burst in March of 2001.
One theory espoused by famed market strategist Ed Yardeni recently on the Masters in Business podcast is really interesting: while noting this is just a theory, he believes that the U.S. economy is so massive and mature now that we could possibly see small, rolling recessions in different sectors of the economy going forward as opposed to the more broad recessions of the past.
He points out that the energy sector recently had its own recession inside of a broad expansion, and the retail sector is going through one now.
Could this be the new normal, as they say? Only time will tell.
Unfortunately, none of this is particularly helpful in predicting what happens next. Will there be a recession in the future? YES. Unequivocally, YES. When will it happen? Nobody knows and nobody knows what the ultimate cause will be. Interest rates rising too fast? Tariffs and trade wars? Inflation? Overheated home prices? Those are all candidates.
The financial media will be loaded with stories of "experts" warning us of the next recession and what's going to cause that recession in the coming weeks, months, and years. Somebody will ultimately be correct, and they will make millions as the person who predicted the next market crash and economic collapse, but it won't have anything to do with that person being especially clairvoyant.
Recessions are part of the business cycle that is ultimately controlled by human behavior, and human behavior is extremely unpredictable. The economy, as a whole, doesn't care what patterns we notice and it certainly isn't looking at the calendar thinking a recession has to happen before 2020. Australia, by contrast, hasn't experienced a recession since 1991.
So go be great this week and try not to worry about things out of your control. Being kind to someone is something you can control and is a much more important use of your energy.
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