July 10, 2012
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Perma-bears are bombarding us with alarm bells, sounding the doom of the US economy. We find ourselves in yet another “summer slowdown scare,” for the third year running. In 2010 and 2011, the purported slowdowns turned out to be soft landings. Investors who ran to the sidelines stared in disbelief as the stock market roared ahead, leaving them behind.
We are likely in the same position now.
Scary headlines attract more eyeballs than good news or a balanced perspective. Interviews tend to go to those proclaiming the end of the expansion – you rarely see the media interviewing someone with a more positive view to offer. As an outsider to the U.S. (I live in Cape Town, South Africa), I am amazed by how quick some Americans are to write off their own economy, which I still believe to be one of the most resilient, innovative, and adaptable on the planet.
In fact, I was so exasperated with the bleak picture painted in the US last fall that I penned an article, published on January 3, 2012, titled “U.S Recession – An Opposing View.” It seemed like reputational suicide at the time – just about every reputable observer, inside the advisory industry and out had written off the expansion. Fortunately, as an outsider, I had nothing to lose. And neither did those investors who stuck it out – the SP-500 gained 7.6% in the first six months since my article appeared, peaking on April 2, 2012 with an 11.1% gain.
Among the bearish voices I most respect is John Hussman, whose work I read regularly. He is thorough and quantitatively rigorous. Whenever I am convinced there will be no recession, I temper my enthusiasm by re-reading his articles to make sure I maintain a balanced view. One day he will be right and I will be wrong, but at least I won’t be blindsided.
Hussman, in this instance, acknowledged my research and approach even though he did not agree with it. This was hardly something he needed to do – he is a big fish, and I’m a comparative minnow. Hussman spent several paragraphs poking holes in my methods, but I did not mind that; I took it as a solid peer review. I’m grateful to him for keeping me honest.
Right now, the models I presented in my January 2012 article remain far from suggesting recession, but, I should add, they are also far from full-blown expansion. US economic growth remains tepid and vulnerable to the slightest external shock. Such risks are not negligible, but neither are they inevitable. The track of the co-incident SuperIndex versus the last seven business cycles aptly illustrates the tepid growth situation in which we find ourselves – we are on the verge of printing a new historical low-watermark for growth after 36 months of expansion. One can understand where the bearish sentiment comes from!
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