On Friday, Philip Coggan reviewed in the Financial Times (UK) what he calls "the latest jeremiad" offering "doomsday predictions about the economy and financial markets." -- Having purveyed a certain number of messages of doom and gloom over the past several years, we suppose we should feel chastened as we contemplate Coggan's olympian equanimity. -- All the more so, in that we are, in fact, among those to whom he refers "with long memories [who] may recall Surviving the Great Depression of 1990 by Ravi Batra (written in 1988)," etc., etc. -- But instead of reassuring us, Coggan's piece alarms us all the more. -- We can only marvel that among the "number of economic imbalances" that do, despite his olympian calm, give the Markets Editor of the Financial Times pause, he deems only "the U.S. trade gap and high consumer debts" worthy of mention. -- We marvel that Peak Oil, global warming, and the social malignancy of an imperial neo-Orwellian neoliberal unilateralist U.S. militarism (the political philosophy that dare not speak its name) escape his attention as reasons for concern. -- What, we wonder, will people twenty years from now think when they encounter this column? -- We admit to doubting whether the advice to "keep six months worth of cash . . . and, among other things, a 'sharp hunting knife,'" which Coggan blithely dismisses, will seem so amusing then....
MESSAGE OF DOOM AND GLOOM CAN STILL AMUSE
By Philip Coggan
Financial Times (UK)
September 30, 2005
http://news.ft.com/cms/s/cc550a58-31be-11da-9c7f-00000e2511c8.html (subscribers only)
The sky is falling. There is always a market for doomsday predictions about the economy and financial markets. Humans seem to get a vicarious thrill from contemplating disaster.
Those with long memories may recall Surviving the Great Depression of 1990 by Ravi Batra (written in 1988). He then had another go: The Crash of the Millennium: Surviving the Coming Inflationary Depression, which was published in 1999. There have also been Meltdown: The Great 90s Depression and How to Come Through It by William Houston (published in 1993) and The Great Reckoning: Protect Yourself in the Coming Depression by James Dale Davidson and Lord Rees Mogg (published in 1994).
I am not sure whether there is a statute of limitations on such predictions. Let us be generous and say five years is a decent interval. So Robert Prechter, author of Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression (published in 2002) has still some time to be proved right. But not much.
As you can see, there is rarely a period when some author is not predicting the worst. As a naturally gloomy sort, I ought to be a sucker for these tomes. But I find, on reading them, that the contrarian instinct seems to be stronger.
Normally, this is because the authors rely on some complicated analysis of charts, or a preordained historical cycle, as the basis of their argument. History is not that neat.
The authors of the latest jeremiad, Jim Mellon & Al Chalabi, almost make it through their book without falling into this trap. But not quite.
In Chapter Six, they suddenly refer to Edgar Cayce, an early 20th century U.S. psychic, who believed that economic depressions occur around every 25 years.
At this stage, they produce a table, citing the recessions that occurred every 25 years since 1783. The table includes 1958 which has an asterisk against it. The footnote says this indicates a "recession that took place without an actual contraction of the overall economy." In other words, not a recession at all.
Thankfully, most of the rest of the book is rather more level-headed. They duly namecheck virtually every factor that might keep an investor awake at night; high consumer debt levels, the U.S. current account deficit, a housing bubble in the Anglo-Saxon economies, the pension burden on ageing economies, terrorism, global warming, and even greater obesity.
The authors' thesis is that severe economic dislocation will appear by 2006 or 2007, leading to higher unemployment and bankruptcies. There will be widespread calls for protectionism, the dollar will be subject to increasing downward pressure, North Korea and Iran will continue to engage in brinkmanship, and al-Qaeda attacks will dent fragile consumer confidence.
Even more alarmingly, "pockets of social unrest (will) become a serious threat to civilized order" and "pandemics in the West will be likely and many could die from illness and malnutrition."
Blimey, that lot should have brought a cheer to your weekend. How likely is any of it? Of course, it is impossible to rule out any of those eventualities. And the authors are quite right to worry about a number of economic imbalances, including the U.S. trade gap and high consumer debts.
The difficulty is in timing and in how the problems resolve themselves. It seems plausible that, over the long term, the dollar will decline in the face of the U.S. trade deficit. But, in the short term, there are plenty of reasons why it might rise, including higher short-term rates in the U.S. than in Europe or Japan and worries about the prospects for eurozone growth. Indeed, although the trade deficit is still growing, the dollar has risen this year.
Similarly, while consumer debt levels and house prices do seem too high, they have seemed so for some time. In the U.K., house prices have so far managed to stall, rather than crash.
Even Japan, which witnessed a bubble in the 1990s, has not really suffered collapse. True, equity and property investors have lost a lot of money and the financial system has been severely weakened. But it has not been a calamity on the scale of the 1930s Depression, with mass unemployment and the kind of social unrest envisaged by the authors.
I think it is safer to think of odds, rather than certainties. When equities or housing or any asset looks expensive relative to historical valuation measures, investors should be limiting their exposure. There is some evidence that markets revert to the mean.
But making long-term bets about economies is enormously difficult. We had the Great Depression in the 1930s, stagflation in the 1970s and a couple of smaller recessions since then. The U.K. has now gone 13 years without a fall in output. Pick the pattern out of that. The authors have a number of suggestions for preparing investors against the coming catastrophe. Some, such as paying off credit card debts, make sense regardless of economic forecasts.
But they veer off the rails by suggesting readers keep six months worth of cash in their houses and, among other things, a "sharp hunting knife." That is more a recipe for a jail sentence or a family tragedy than a piece of investment advice.
--Wake Up!: Survive and Prosper in the Coming Economic Turmoil by Jim Mellon & Al Chalabi, published by Capstone.