Pundits say, “If you put ten economists in a room, you’ll hear 11 different opinions.” Given the current state of the economy and its uncertain outlook, “economists” could be expanded to include professors, authors, investors, executives and institutions.
More than thirty months have passed since the official start of the so-called “Great Recession,” yet the National Bureau of Economic Research (official arbiter of business cycles), believes that calling its end would be “premature.” Despite this, one can’t deny that since the trough of the recession, economic indicators have improved, the stock market has performed well, M&A activity has rebounded, and corporate earnings have spiked, among other bits of positive news. Nonetheless, the future remains uncertain: optimistic in some respects, yet troubling in others.
In our previous monthly exchange, “A Prospective Viewpoint: Six Factors that will Drive an Increase in M&A,” we opined on the outlook for M&A, concluding that the recent recovery in M&A is not just a temporary phenomenon, rather a trend that will continue through 2010 and into 2011. Our opinion hasn’t changed regarding the M&A market, yet recently we’ve noticed a widening array of views by well-respected individuals and thought leaders regarding the overall economic outlook.
What follows are divergent views on the economic outlook, which span the spectrum, ranging from nearly predicting Armageddon to warning investors not to bet against America. We begin with the former. The following individuals paint a dark and gloomy picture of the economic outlook and are not convinced that the economy is on a path toward recovery…
“The situation today is vastly worse than two years ago. We had less debt then and more people employed then. Today we have more hidden risks to the system, more explicit risks, and on top of that we have a lower tax base. So explain to me [how] this remedy is going to work.”
-Nassim Taleb, author of “The Black Swan” and professor of risk engineering at New York University (in an interview on CNBC)
“Thus, the recent events in Greece, Portugal, Ireland, Italy, and Spain are but the second stage of the recent global financial crisis. The socialization of private losses and fiscal laxity aimed at stimulating economies in a slump have led to a dangerous build-up of public budget deficits and debt. So the recent global financial crisis is not over; it has, instead, reached a new and more dangerous stage.”
-Nouriel Roubini, professor of economics at New York University and chairman of Roubini Global Economics (in an article titled “Return to the Abyss”)
“Now we face a world economy with weak aggregate demand in the U.S. and Europe, bulging budget deficits, sovereign debt downgrading and consumers unwilling to borrow. Governments are fighting for market credibility via draconian cuts in spending. This too is the wrong approach. We should avoid a simplistic austerity to follow the simplistic stimulus of last year…We need, in sum, to reset our macroeconomic timetables. There are no short-term miracles, only the threat of more bubbles if we pursue economic illusions. To rebuild our economies, the watchword must be investment rather than stimulus.”
-Jeffrey Sachs, director of the Earth Institute at Columbia University and the author of "Common Wealth: Economics for a Crowded Planet" (in an op-ed from the Financial Times titled “Time to Plan for Post-Keynesian Era”)
…and “double dip” has emerged as the latest buzzword from concerns that the recent recovery is merely a blip on the radar screen…
“I don’t believe there’s going to be meaningful job creation, and I don’t believe there’s going to be a meaningful turnaround in spending. In fact, I am more bearish than I’ve been in a year. I have the strongest conviction that there’s going to be a double dip in housing. I think you’ll start to see that in July, August, September.”
-Meredith Whitney, chief executive officer of Meredith Whitney Advisory Group, LLC (in an interview with Charlie Rose)
“The only reason the economy isn't in a double-dip recession already is because of three temporary boosts: the federal stimulus (of which 75 percent has been spent), near-zero interest rates (which can't continue much longer without igniting speculative bubbles), and replacements (consumers have had to replace worn-out cars and appliances, and businesses had to replace worn-down inventories)…But all these boosts will end soon. Then we're in the dip.”
-Robert Reich, former secretary of labor and professor of public policy at the University of California at Berkeley (in an article titled “Why We’re Falling into a Double-Dip Recession”)
“But the collapse of the financial system as we know it is real, and the crisis is far from over. Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt…Doubts about sovereign credit are forcing reductions in budget deficits at a time when the banks and the economy may not be strong enough to permit the pursuit of fiscal rectitude. We find ourselves in a situation eerily reminiscent of the 1930s. Keynes has taught us that budget deficits are essential for counter cyclical policies yet many governments have to reduce them under pressure from financial markets. This is liable to push the global economy into a double dip.”
-George Soros, chairman of Soros Fund Management and author of “The Crash of 2008”
…yet some don’t seem convinced by the “double dip” prognosis…
“Those who want to know what is going on must sift through all of this bipartisan gloom to distinguish between (1) agenda-driven dire warnings and (2) the boring reality of a sluggish recovery being partially paralyzed by ominous threats of punitive taxes and onerous regulation.”
-Alan Reynolds, senior fellow with the Cato Institute and the author of "Income and Wealth" (in an op-ed from The Wall Street Journal titled “Don’t Believe the Double-Dippers”)
…whereas others tend to focus on the pervasive uncertainty, in some cases noting both positive and negative factors affecting the outlook…
“Through a series of transitions, collisions, and trade-offs (the journey), we are heading to a world that is re-regulated, de-levered, and growing less rapidly in the industrial countries (the destination). It is a world in which concerns about the dark side of globalization temper enthusiasm for its net benefits, and in which politics matter a lot for markets and the economy…The world is on a journey to an unstable destination, through unfamiliar territory, on an uneven road and, critically, having already used its spare tire(s).”
-Mohamed El-Erian, chief executive officer and co-chief investment officer of PIMCO (from an article titled “Driving Without a Spare”)
“We are drifting. We take comfort in bits of good news, but we are in dangerous waters; the Great Recession is being starkly revealed as a global crisis with the U.S., the traditional engine of recovery, sputtering on every cylinder…The only real energy in the economy has come from the cessation of inventory liquidation, which is now the main factor in rising industrial output and any modest improvement in the economy.”
-Mort Zuckerman, editor in chief of U.S. News & World Report and chairman and co-founder of Boston Properties (in an op-ed from the Financial Times titled “America’s Jobless Picture is Alarmingly Bleak”)
…and for nearly every opinion, there is a counter opinion, as shown below concerning the significance of perception and confidence…
“In fact, there is still a real risk of a double-dip recession, though it can’t be quantified by the statistical models that economists use for forecasts. Instead, the danger stems from the weakness and vulnerability of confidence — whose decline could bring markets down, further stress balance sheets and cause cuts in consumption, investment and local government expenditures. Ultimately, the risk resides largely in social psychology. It is the fear of fear itself, of which Franklin D. Roosevelt famously spoke.”
-Robert Shiller, professor of economics and finance at Yale and a co-founder and the chief economist of MacroMarkets LLC (in an op-ed from The New York Times titled “Fear of a Double Dip Could Cause One”)
“It’s not about perception at all, I am a realist…With the decline of housing prices, consumers went off a cliff. They just don’t have the kind of spending power or desire they did in the past.”
-Gary Shilling, former chief economist at Merrill Lynch and president of A. Gary Shilling & Co. (in an interview with Bloomberg Businessweek)
…and finally, those who are optimistic about the future (some more optimistic than others)…
“Though housing is weak and debt and deficit levels are rising, compared to the rest of the world the U.S. is in reasonably good shape. Our economic fundamentals are sound… The recovery that took root last summer with the help of government stimulus now seems to be evolving into a self-sustaining expansion.”
-Bob Doll, vice chairman and chief equity strategist for fundamental equities at BlackRock, and lead portfolio manager for the BlackRock Large Cap Series (from an op-ed in The Wall Street Journal titled “The Bullish Case for U.S. Equities”)
“The economic expansion is broadening out across the country, with nearly two- thirds of the nation's metro areas now out of recession. The strongest areas are mostly in the South and Midwest, as the economy is benefiting from the strong turn in manufacturing activity, a solid farm economy and more stable housing markets.”
-Mark Zandi, chief economist for Moody’s Analytics (in an interview with McClatchy Newspapers)
“I think a growth trajectory is in place. I think U.S. growth is going to surprise us at over 4% in the second quarter and in the second half of the year. We’re going to have above-trend growth — I see absolutely no second dip. I’m not saying there won’t be some quarters that are a lot better than others. But what I’ve seen is that it’s now turning into a self-sustaining recovery. It’s no longer dependent on tax cuts and cash-for-clunkers and all the rest.”
-Jeremy Siegel, professor of finance at The Wharton School of the University of Pennsylvania
“I’m not concerned about [a double dip] at all today. It’s more likely there could be a V-shaped recovery…Corporate earnings are coming in ahead of expectations, the stock market is stronger and there's a vibrant credit market. With the final leg of a rising housing market, the outlook for 2011 could be very strong.”
-John Paulson, president and portfolio manager of Paulson & Co. Inc.
…including Warren Buffett, whose words are often simple, yet profound.
“Nothing is going to sink this country. If you want to bet against America, you’re going to lose a lot of money.”
-Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc. (in an interview on CNBC)
While we continue to see positive trends in the M&A market supporting a recovery in deal activity through 2010 and into 2011, prognosticators point to an uncertain picture of the global economic outlook.
We likely are several months past the worst of the “Great Recession,” although still there is yet to emerge a loud, clear, strong and consistent vision of the future that awaits us.