On “The Economy” (If Such A Thing Exists)

republican_candidatesOne of the odd things about listening to Republican candidates for president is their insistence on describing the ‘weak economy’ or the ‘anemic recovery’ of the Obama Presidency. For which they propose a new approach, naturally.

And obviously we understand why they say that. But just to be clear – that’s crazy talk.

“The US Economy,” if such an abstract thing even exists, may be described in short-hand by

  1. The National Unemployment Rate
  2. The Inflation Rate
  3. Gross Domestic Product (GDP) growth
  4. Asset Prices – Like a broad US stock index (and maybe housing)

There are obviously many other things that impact how people feel about the economy, but on the grand scale of these four economic conditions – GDP, Unemployment, Inflation, and Stocks in 2015 – it doesn’t get any better than right now.

The Unemployment Rate

The Bureau of Labor Statistics reports a 5 percent national (seasonally adjusted) unemployment rate, the lowest since 2008. The unemployment rate has only rarely been this low since about 1971.

Inflation

The past year’s inflation rate (through October 2015) was 0.2%, a ridiculously favorable rate. This is a stunning rebuke of the chicken-little claims about loose monetary policy since 2008, and it partly explains why the Federal Reserve waited so many years – until this week – to begin raising interest rates. No inflation. The last three annual inflation readings this low were 2009, 1955, and 1949. Again, it doesn’t get any better than this.

GDP Growth

The 2.4 percent annual GDP growth in 2014 – a crude measure of our increasing national output and wealth – is a reasonable historical rate. It’s grown faster in the past – an average of 3.22 percent since 1948 – but it sure beats shrinkage, and it’s not anything close to a recession or even particularly ‘anemic.’

gdp

Asset Prices

As of this writing the S&P500 Index is within spitting distance (off 3 percent) from its all-time historic highwater mark of 2134, something that could be breached without any warning in a day, or week.

In sum: We are living through the kind of incredible boom-time economic conditions that – as the 1980s hair-metal band Cinderella sang – you “Don’t Know What You Got ‘Till Its Gone.

When things get worse in the future, we will look back fondly to recognize 2015 as the Goldilocks situation that it was.

So, please guys, stop complaining about “The Weak Economy.”

“The US Economy” – at least in aggregate – is humming along awesomely.

Now, let me clarify: I don’t give President Obama credit for this economic boom. Frankly, no US president deserves much credit or blame for the performance of an economy during his tenure. We can’t stop critics or supporters from assigning credit and blame – that’s just what critics and supporters do – but thinking people (psst, that’s you and me) know better than to believe in it.

A Non-Crazy Position

One sort of reasonable position to take is that there’s no such thing as ‘The US Economy,’ but rather a variety of regionally and demographically-specific financial conditions. Think of South Texas, or rust-best manufacturing, or our inner cities.

“The economy” of South Texas for example is headed for an apocalyptic set of oil-based bankruptcies right now.

The “manufacturing economy” could be described as anemic, and is in a multi-decade secular decline. That will be true until, well, until always, because we pay people more money in this country than they are paid to do the same manufacturing jobs in other countries, which makes us less competitive in manufacturing. Overall that’s a high-class national problem, because it means workers get better pay here than in other places, but it obviously doesn’t feel like a blessing to traditional manufacturing employees.

And then there’s the “inner city economy”: high-school dropouts in our inner cities face inter-generational poverty for which there is no cure in sight. To a 20-24 year-old black man in 2015 – experiencing a 16.7 percent rate of unemployment right now – the difference between a recession and a boom in our overall economy may be hard to see. It likely feels like it’s always a recession in the inner city. The Obama presidency didn’t change that. Johnson’s “War on Poverty” didn’t change that. The economy will be weak in the inner city until college outpaces prison as the most-likely institutional destination for ambitious young black men.

we_think_inequality_is

It’s The Inequality, Stupid

One of my pet peeves of Presidential candidate discourse – and Rs and Ds do this in equal measure – is the laser-like focus on ‘middle-class jobs,’ as if everyone is middle class or above in this country. We engage in a weird collective blindness, as if pockets of extraordinary poverty don’t exist.

The so-called “Obama recovery” can seem weak to many because a booming economy produces very unequally-distributed benefits.

For the 50 percent of American households currently boasting zero to negative net worth, this “awesome economy” means very little.

For the top 10 percent of American households – who control 85 percent of financial assets – there’s nothing ‘anemic’ about the economic recovery of the Obama years.

With stocks up more than 100% since the Great Recession of 2009, in fact, the “awesome economy” of the past 7 years amply rewarded existing owners of wealth. Obviously, the other 90 percent of American households should feel differently. They’ve benefited very little by comparison.

There’s plenty to be upset about during the “Obama recovery.” It’s not at all true – as I think too many candidates for President argue – that the recovery is weak. It’s that the recovery is unequal.

 

A version of this post ran in the San Antonio Express News.

 

 

 

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I Miss The Great Recession Already

End of recessionI’m just going to come out and say it, ok?  I miss the Great Recession already.

I miss it for two reasons: first as an investor and second as a human.

The Investment Side of the Great Recession

As an investor, the Great Recession represented the good times, now past.[1]

Recessions – or at least their financial unfolding via changes in asset prices – cause not only wealth destruction, but also wealth creation.  For investors[2] in particular, a recession is often necessary in order to deploy capital at attractive prices.

Warren Buffett famously gets irritated about the lack of investment opportunities in his annual Berkshire Hathaway letters during boom times, like his 1999 letter[3] and 2007 letter,[4] because prices of public securities outpace intrinsic value.  Conversely, he gets very busy and active buying companies when prices drop and other investors flee.  Recessions for Buffett, as well as for many investors, represent the best time to accumulate wealth.  Which is why he famously says:

“Be fearful when others are greedy, and be greedy when others are fearful.”

 

Another famous value investor, Shelby Collum Davis,[5] said more pointedly:

“You make most of your money in a bear market.  You just don’t know it at the time.”

If you believe Buffett and Davis, as I do, then you too will think wistfully of the Great Recession because, as an investor, the good times are in the past.  Now, with US equity indexes up over 100% from their March 2009 lows, investing consists of purchasing expensive assets and hoping they get more expensive.  Which has a lot more to do with gambling than it does with investing.

The Human Side of the Great Recession

Of course this may sound awfully callous from a human perspective, and I don’t mean to diminish the real human suffering of the Great Recession.  In fact, on the contrary, it’s the humanity that emerged during the Great Recession that I want to call attention to, as the part I’m going to miss the most.

Remember when your 401K lost 5% of its value every month – month after month after month – between August 2008 and March 2009?  Remember that you just stopped regularly checking its value – or any part of your supposed net worth – by about December 2008, because the whole thing just became too painful to contemplate?

At that moment, falling into the Great Recession, we all confronted, in our own way, the painful reality that our human worth had to be something other than our financial net worth.  Because otherwise we just became half of who we were.

Remember when in the space of just a few short months either you – or someone you knew well – lost a job, a house, or a business?

As awful as that was, our collective acknowledgement of suffering changed the way we acted on a daily basis.  For people relatively well off, the new austerity forced a kind of back-to-basics approach to living.  Luxury consumption plummeted, and staycations soared in popularity, if only out of solidarity with those who suffered even more.

I personally lost money in the Great Recession.  But what turns out to be even more painful, as a fiduciary, is losing other people’s money.  I dreaded calling investors on the phone to report a loss, and I dreaded, worse yet, seeing them in person.  To make it more painful for me, my investors, unfortunately, were often my friends and family.  The thought of it kept me awake and tossing in bed in the 1-3am hours.  For a couple of years.  Not good times.

Would you like to know what reduced me tears, however?  It was the investors who told me it was going to be ok, that they still believed in me, and that the lost money didn’t mean they valued me less as a person.  Even as I write this now, it gets a little dusty in the room when I think of that.

There’s a human element that only reveals itself in the bad times.

Laissez Les Bons Temps Rouler

My sense is that sometime between Groundhog Day and Mardi Gras 2013, the Financial Infotainment Industrial Complex will peak out at the nation’s Great Recession shadow, and officially declare the long Winter finally over.

That declaration will signal it’s time for luxury living again and real vacations.  Masters of the Universe will know they can safely begin to channel their inner Patrick Bateman in public again.

In that smooth shift from Recovery to laissez les bons temps rouler I’m certain we’ll go back to checking our net worths in the mirror more often, and possibly our human worths less often.

But I hope we’ll hold on to the memory of what we had, and lost, and recovered, during the Great Recession.

Mardi-Gras-Mask



[1] I acknowledge I’m being colloquial, not academic, about what I mean by a recession generally or the Great Recession in particular.  I don’t mean an economist’s definition of recession, which would refer to changes in GDP.  I also don’t mean to quibble about an US equity ‘bear market,’ as it’s been a few years since that occurred.  What I really mean is a holistic sense that, with unemployment below 8% nationally and the general level of stocks approaching their 2007 highs, the national mood has swung away from Recession and toward Recovery and I’m confident soon enough we’ll be in Boom Times.

[2] By “investor” I mean as distinct from “gambler,” which is what most of us do when we purchase public securities.

[3] Which I’ve helpfully linked to here, and would call your attention in particular to page 16, in which he anticipates the bursting of the tech bubble and the bursting of the equity bull market in general.

[4] Which is linked to here, and I’d call your attention to pages 18-20 in which Buffett tries to lower expectations for equity returns going forward.

[5] Whose son and grandsons run this firm, Davis Advisors.

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