Conditions now are fundamentally different from 2008.
George Will’s recent syndicated column, “America Is Overdue for Another Economic Disaster,” puts me in the painful position of having to decide if I want to ignore a topic that should not be ignored, or if I want to take on one of the great op-ed writers of all time. I am not sure I have disagreed with even three columns George has written over the decades I’ve been reading him, and I hold him in extraordinarily high regard. But his stab at economic fearmongering warrants a response.
The article serves as a compilation of the most commonly uttered refrains from market bears about the current stock market and economy: that this bull market is the longest ever, that a Lehman Brothers–like collapse is around the corner, that this economic expansion is long in the tooth, and that deficits and debt stand to blow us to smithereens. As is usually the case, even with many writers who are but a fraction as smart and gifted as George Will, the argument comes by blending technically accurate factoids with deceiving or poorly nuanced conclusions.
And the melodrama of appeals to the memory of Lehman Brothers (“Those who see no Lehman-like episode on the horizon did not see the last one,” writes Will) manages to whip readers into a perfect frenzy of fear and usually irrational behavior.
Let’s be clear. If the basic point of the piece were merely to point out the rather obvious fact that President Trump’s claims that this is “the greatest economy we have ever had” are patently absurd, there would be no beef. The president’s boasts do fail to pass the math test, since, as Will points out, we have had 101 quarters since 1947 as strong or stronger as the one we just finished. The fact that politicians exaggerate facts and figures to their benefit is where the word “spin” comes from, even if this president seems to be particularly fond of the practice. My concern with Will’s article is not that he wants to correct the administration’s claims about the strength of the economy.
Rather, it is in the tired and vanilla analysis that seeks to use the length of this economic expansion as indicative or predictive of, well, anything. While this bull market — defined as a period of no 20 percent declines in equity prices from peak to trough — is the longest on record (though prices fell by 19.8 percent in the summer of 2011), the magnitude of this economic recovery is nowhere near those of past recoveries. In other words, tenure is in tension with magnitude, rendering comparisons to past periods highly questionable. This stock bull market has gone on for a long time, but the vast majority of it came in a 1–2 percent real GDP environment, not the 4–7 percent environments typical of post-recession periods. It has also gone on with very little participation from some key international partners. Global divergence in monetary policy, let alone fiscal conditions, makes past comparisons tricky as well.
The easy response to me would be, “He is a wealth manager — of course he wants to think the stock market will keep going up forever!” But not only is that untrue, it is also not the basis of my criticism of Will’s article. I do not believe this market will go up forever, but I do believe that comparisons to Lehman–like implosions are unhelpful, dishonest, reckless, and uninformed. Not every rainstorm a town has after it suffers a hurricane is a hurricane. That doesn’t mean there are no more rainstorms; it just means to act like every rainstorm will be like the last hurricane is to encourage a sort of permanent PTSD mentality in the society. It both is reckless to the emotional composition of the investing public and takes no heed of facts about the current economy: Are the banks as levered as they were in 2008? Are global credit conditions comparable to 2008? Is household leverage the same as it was in 2008? Household leverage (debt divided by balance-sheet assets) is at a forty-year low in this country. There probably is not a single economic condition one could find in the present environment equal to the pre–Lehman environment of 2008. Unfortunately, a warning of, “Beware, cyclical recessions and downturns are part of economic life,” would not pack quite the same punch as, “A Lehman–like collapse is coming.” Will is better than this.
And this brings me to my real criticism of his article: not where he is wrong, but where he is right. As American households have spent nine years de-leveraging and repairing balance sheets, and as American corporations have embarked upon a decade of capital-structure optimization, governments have indeed spent us into oblivion. There does exist a real fiscal mess around unfunded entitlements, and there is no political will on either side of the aisle to address it. This is a topic we need to discuss, but no discussion is possible when those raising it are discarded as cranks and perma-bears siding with the Harry Dents and Peter Schiffs of the world. Will inadvertently damages his legitimate argument about the government-debt problem with his prediction of the coming “collapse.”
Could the stock market revert? Sure. Could a period of real-GDP expansion begin behind corporate tax reform, where resurgent business investment (up 9.5 percent year-over-year through the first half of 2018) leads to a remarkable era of capital expenditures and subsequent improvements to productivity and profits? Absolutely. But the point is not to wear rose-colored glasses and forecast with the same degree of blind, overconfident certainty that the newsletter-writing perma-bears indulge in.
Rather, the point is to see the present environment for what it is. A credit implosion that had not taken place in 80 years brought the world to its economic knees one decade ago. The recovery has featured unprecedented actions from central banks, the aftermath of which have absolutely no precedent from which we can construct confident predictions. In nearly every aspect we are living in unprecedented times. At plus-23 percent year-over-year, corporate-earnings growth is remarkable. But lest one believe this is all tax-reform driven, top-line revenue growth is also making new records, at 9.2 percent yearly. GDP growth is expanding, for now. And all of this is taking place in the context of tremendous uncertainties around the national debt.
It is never a perfect time to be a perma-bull or a perma-bear. It is currently the worst time to be making predictions of a Lehman–like collapse. The real challenges we face require more sober judgment than that.
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