Dying of Old Age

Economies aren't like people. They don't have a lifespan. Yet, most of the press seems to be operating under the mistaken premise the global economy is a kindly old geezer, hobbling forward with cane in hand to the doctor's office…terminally diseased and on the brink of meeting his maker.

We've argued many times in this space that trends last longer than most expect. And even more importantly, unless some disruptive force enters, economies usually just keep on growing. Instead of this benign and generally happy realization, the press has crafted a love affair with the notion of cycles and death. The blight of winter has descended upon us!

It's true that things often ebb and flow in an economy, but not in a nice, tidy way. And there's nothing that says just because we've had a number of years of positive economic output it means we're in for a recession soon. We quote our bearded bard Bernanke: "I would make a point, there seems to be a sense that expansions die of old age. ...I don't think the evidence supports that."

From today's report, fourth quarter 2006 GDP was up 3.1% from the same period in 2005. This final revision reflected stronger than expected growth without a precipitous rise in inflation. Read more about it here:

Economy Grows at 2.5 Percent Pace in 4Q
By Jeannine Aversa, Chicago Tribune

This news is either taken as stalling the inevitable (that the economy is headed into recession), or as an aberration. (i.e., while treatments may ease the pain, it won't cure the ailment. This poor guy's case is terminal.)

Today's GDP figures are actually very normal, and very healthy. But, apparently this was "the third quarter in a row where the economy's growth clocked in at a lethargic 2 percent or better." Huh? Ah, yes. Our patient is old and sick…the end is near. It's just a matter of time. Let's prepare the last rites.

This logic seeps into much of today's financial analysis. Consider this argument: because pretax corporate profits are up double digits from last year and pretax profits as a share of GDP was recently at their highest level in over 50 years…of course, this foretells future cost-cutting and economic doom.

Profit Pullback May Foretell Cost Cutting
By Justin LaHart, The Wall Street Journal (*site requires registration)
https://www.wsj.com/articles/SB117513052556152681

The best investment ideas come from something that's unfathomable to most…yet the objective data fully supports. The idea that the economy is healthy, thriving, and could even (gulp) accelerate this year is simply unfathomable to most.

This is primarily because most investors are far too myopic. It becomes increasingly absurd to think US sub-prime loan activity is a really big deal in relationship to the sprawling global economy—but you have to be willing to look at the big picture to get it. We've touted globalization time and again, but still don't think people get just how connected, integrated, and stable things are today…and just how BIG the economy really is.

"A recent Wall Street Journal/NBC News poll found only 35% of those with at least a four-year college degree believe 'that the U.S. is benefiting from the global economy.'" Why is it so hard for Americans to believe we are benefiting tremendously from global economic growth? Shouldn't soaring global GDP growth and exceptionally low unemployment be enough to convince the naysayers?

As Globalization's Benefits Grow, So Do Its Skeptics
By David Wessel, Wall Street Journal (*site requires registration)
https://www.wsj.com/articles/SB117509956305051961

The press is saying: sure, the patient is healthy today and has been healthy for some time, but he's also a year older, which means he's one year closer to death.

This is an absurd metaphor. Ignore it.