As most of you know, we here at TAAG do not find much value in the exercise of trying to forecast the short or intermediate outlook of markets or the economy. All of our brains are wired to constantly crave information that will give us some insight to help us make better decisions with our money. Unfortunately, the name of the game when it comes to short term forecasting is uncertainty, despite the endless line of “experts” willing to line up and take their run at claiming to know what’s next. Go with their suggestions over and over again and you’re bound to lose.
That said, one of the best sessions at a recent conference I attended featured Ed Lazear. One of the world’s most renowned labor economists, recipient of most awards having to do with economics, chair of the more recent President Bush’s Council of Economic Advisers, advisor to governments around the world and currently a graduate school professor splitting time at both Stanford and the University of Chicago, Ed is a smart guy and worth listening to when it comes to all things economics.
I thought it would be worth passing along some of his thoughts on the current environment and all the “stuff” or noise surrounding our economy, what truly is cause for concern, and why we should be optimistic in the long run.
– Ignore the Forecasts
o When asked, Lazear estimated GDP will grow 2.5-3% in the next year, but that was just a guess. He went on to say that listening to any prediction about what the economy is going to do over a particular month, quarter or even year is pretty much a stab in the dark. While serving at the White House, his team would have all the economic data to generate the GDP growth rate for a given month. They would hand off the data to the number crunchers and within a few hours, GDP would be reported. Even with all of the data known and in their hands, Ed admitted their in-house advance estimates being off 0.75% or more, a pretty big margin of error for a number that’s historically in the 3-4% range annually. There are simply too many drivers for any one person to truly claim they know what’s coming next, much less how markets might react as a result.
– The Bad News
o Our unemployment rate remains tremendously high and is trending more in line with France’s than Germany’s which, historically, is not a comparison we want to aspire to. The real long term concern lies with our deficit and debt. The ratio of our deficit to GDP is entirely too high and rising. In the long run, allowing some of our entitlement programs to continue without any reform is what will truly cause our debt to skyrocket even further. It will take tough solutions to help get these trends moving in the right direction again. Moving in the direction we are today is simply not an option. The world took a pretty big hit over the last several years, but the U.S. is climbing back, albeit at a snail’s pace
– The Upside
o Lazear closed the session by mentioning that despite all of the doom and gloom, this is likely to go down as one of the healthiest turning points in our country’s economic history. For the first time in a long time, the national budget and the size of our government is front page news and front of mind for many citizens. This, in his mind, is hugely positive and will push us to innovate and develop solutions. The arguing and posturing in Washington, while extremely frustrating, is the nature of politics and will turn as constituents demand. All parties involved know they have to deal with this in the relatively near future. Not dealing with it is a “death sentence”.
o Ultimately, he sees an agreement being reached. He personally likes the idea of cutting the budget across the board at “X” percent per year for a number of years as an approach. It creates a disciplined process that allows groups to plan for without causing any one area more than their share of pain.
The point of this update is not to give you yet another person’s opinion on what’s to come, but to give you a long term, measured look at how one of the smartest guys in any room sees what can, at times, appear to be an overwhelmingly impossible situation. There’s no doubt there are major challenges in this world, but, as with investing, that creates more opportunities and higher expected returns for markets and society in the long run.
Have a great week!
Chip Workman, CFP®