Every day I wake up at around 7:15am, get dressed, bike to work, and spend the first hour of my day reading the news.
I read the New York Times, the Wall Street Journal, the Economist, and about a billion other miscellaneous business, economics, and entrepreneurship related publications, news aggregators, and blogs. I also have a growing list of English language Vietnam business news sources which I slowly work through over the course of the day. So probably about two hours of average total news reading daily.
I feel like studying the news is an important part of what I do. It allows me to know what’s going on domestically and internationally, to tie it all together in my mind, and to sound smart when I speak to clients or partners. I recently had a phone meeting with a brokerage VP from Morgan Stanley and he seemed a bit annoyed that I didn’t really know anything about the Morgan Stanley + Citigroup merger. Mostly though I feel that I have a pretty good overview of what’s getting discussed in the press these days.
Reading so much news is definitely distorting my perspective, but I can’t tell how.
I figure that I might have developed a hugely exaggerated view of the craziness of the current global economic and political situation, as I am constantly being bombarded by a magnified version of the worlds day to day freakouts. Or, I might have the exact opposite distortion; I might not really understand or appreciate the massive scale and importance of the changes occurring in the world right now because I am lost in the foam and froth of daily details.
Right now journalists are all grasping at understanding the potential direction, aftermath, solutions and ramifications of this current global financial-economic crisis/recession/apocalypse.
Despite really dedicating a huge amount of time and thought to figuring it all out for myself, I don’t have much of a clear idea of what’s actually going right now on or what exactly any of it means for the future.
Whatever happens though, everyone is going to claim that they saw it coming. Looking back on it, everybody says that they saw the tech/dot-com bubble coming, that it was obvious. I think at the time there were legitimate reasons to believe that tech really was the new economy, and the websites that staked their claim now would have huge ongoing advantage. Now people are starting to come out of the woodwork and claim that they saw this entire current mess coming. I doubt it. If you go back and read people’s economic predictions from a few years ago, most will probably have some argument about oil prices. Remember oil prices? Ha.
I don’t normally re-write about things that I’ve read elsewhere online, I feel that bloggers already waste far too much effort on that kind of churn. But I’m going to deviate from my rule this one time, as a kind of thought experiment.
I am going to attempt at sort out some of the major themes that I’m seeing in the news these days, and try to make some predictions about what they might mean for the future. If I’m actually right about anything, I too can look back and say “I saw it coming.” But what I expect is to look back in embarrassment and maybe some added appreciation of how unpredictable things are.
Davids interpretation of the news, and vague predictions of the future, April 2009:
There seems to be a major re-evaluation of the basic nature financial investment and risk going on. Stock prices have collapsed. Banks and huge companies are failing and getting rescued by the government. No one is investing. There was only one US IPO so far this year, and venture capital investment is down 71%. There is a global consensus that Wall Street finally went too far, fueling huge debates about new regulation and executive pay restriction.
The common wisdom used to be that the key to getting rich/financial independence/retirement in America was saving up your money and putting it in the stock market. Some stocks would do well, some would do less well, some years would be especially good, some would be not so good, but on average you could expect your money to grow about 10% annually as it had historically until about the year 2000. Even better was to buy a house, you could live in it, there were various tax benefits, and it was less abstract. This system of building wealth was implicitly promised to us by modern financial society.
This promise has been broken, and this system has failed those who relied on it. While there was always the recognition that investing involves risk, assets prices weren”t supposed to collapse like this.
I don’t believe that this happened because of any grand conspiracy or some epic level of greed in the financial industry. Everyone was playing the game according to what they thought the rules were. We all just overestimated how much asset prices were based on their underlying value, and underestimated how much they are based on peoples demand for things to invest in.
Of course we saw this in the 2001 tech bubble, and in various other historical examples of asset bubbles, all the way back to the often cited stupid Dutch tulip craze of 1600-whatever. But we don’t usually see the entire financial sector go pop. And this time the pop took the entire world economy down with it. Whoops.
We also failed to realize the extent to which our financial institutions were taking big, leveraged, bets on these assets. And how intertwined these positions were with everything else. Whoops.
So now we’re in this period of spiraling doom as the slowing down of some things fuel further slow downs in other things. Great.
Eventually though, barring further catastrophe, we’ll probably snap out of it.
That’s the big thing that everyone is trying to predict right now, how long this recession will last. Some say a long long time, some says it’s already wrapping up. I don’t think you can predict it. There are certainly still big problems to overcome: unemployment, unused capacity, toxic assets, and what have you. On the other hand there is still a world full of people that would like nothing more than to go back to making and buying stuff as usual.
Lately we’ve seen just how much economic activity relies on confidence, not just consumer confidence but also investor confidence and business confidence. People feel uncertain. How they’ll feel in six months or a year depends on the news, and the news by definition depends on random and unpredictable events. How long the gloom will last is anyone’s guess. Some percentage of predictions will be right regardless.
Whenever the economy really starts to recover, I expect that investors will want back in as they slowly regain their risk tolerance. I predict that we’ll probably see is a rush of people and cleverness back into Wall Street. New types of investment vehicles will get dreamed up, probably by new firms we haven’t heard of yet. They will have to work their way around the new regulations and figure out some clever ways to ensure investors that there is some tangible underlying value to their assets. There’s going to be a lot of money to be made by making people feel safe.
Another big theme I’m seeing dispersed through the news lately is a serious challenging of the standard beliefs of how monetary and fiscal policy are enough to stabilize the economy.
When studying economics I learned about how careful tweaking of government spending and interest rates supposedly help keep everything running smoothly.
During the last years, we’ve been hitting the monetary gas pedal as hard as we can by maintaining super low interest rates. Now we’re also injecting an incomprehensibly large fiscal stimulus to shock the economy back in to motion. This seems like the best thing to do.
Economic activity is facilitated by money, and it can be limited if there’s not enough money, or if the money is not moving fast enough. Economic also activity feeds on itself, so it can be boosted by an stimulus of cash or spending by the government. The reason we need this massive stimulus to increase the money supply so much right now is that the velocity of money is so low, everything is moving in slow motion. This should get things moving again.
Some time in the long run, I could see this hugely expanded monetary base, combined with the mounting pressures of the national debt, and growing grumpyness from countries about holding all their reserves in dollars, leading us into a situation of serious inflation.
Once the economy picks up, and the velocity of money along with it, we are going to have way too much active money flying around way too fast. If foreign governments eventually start dumping our debt it’s going to further increase the supply of dollars looking for something to do.
The other edge of that sword is that it would become a lot harder for us to continue to pay for our debt. We won’t be as able to just roll it over by selling these endless dollar bonds to countries building their reserves, as we’ve been doing. So allowing some inflation, making it cheaper for us to pay back our debt, might start to look really tempting. And that could easily get spin of control.
I can’t really say I expect this to happen. It seems like the current fed and Obama administrations will be smart enough to properly control if things get overheated, and long sighted enough not to undermine the nations long-term creditworthiness.
But then again, as we’re seeing now, sometimes the economic systems we rely on have a funny way of all failing at the same time. Something weird could happen and we might not have a choice.
My more likely prediction is that we’ll just have to get used to watching the economy very closely from now on, and controlling for new kinds of potential problems as they start to emerge – even at the expense of economic growth – instead of just trusting that the market will automatically work everything out.
It seems like this Chinese and Russian talk about moving away from the dollar as a reserve currency might be nothing more than a bunch of jumping up and down and arm waving for attention. Just a political chance to say “haha, your economy broke.” There just really isn’t any other reasonable alternative way for them to hold their reserves. They need dollars to clear international transactions, other currencies have at least as many problems, and the talk about using IMF SDRs doesn’t make any sense as they are not a currency, just a claim on other currencies. SDRs don’t do anything that you can’t do for yourself in forex markets. There is also some discussion of creating a new non-dollar international reserve currency, and I don’t think that makes much sense either. You’d still have to convert it to something to use it.
What this does show is an official grumpiness from other countries about the dominance of the dollar, and opens the window for people to imagine a non-America-dominated global financial system. But for now the structure of our global financial systems and institutions is pretty sticky and ingrained, and it really isn’t the time to be messing with them. Eventually though, these things will change. That’s always an easy bet to make.
Ok, that’s the world and the future as best as I can figure it out based on the news I’ve been reading.
I don’t think anyone else has any real idea exactly what the hell is going on either, and I have yet to read any thoughtful or convincing predictions about what to expect from it.
Of course, 5 or 10 years from now, once whatever the hell is going now has all played itself out, everybody is going to say that whatever came next was completely obvious to them all along. And I alone will be able to look back at this and prove that I never even had a clue.
