I was on a roll. In the post-pandemic world, thus far Iron Capital has been spot on in terms of economic forecasts, and that is saying something considering how incredibly wrong most of Wall Street has been. The majority view has been that we are heading into a recession, and we have been consistent in saying that is wrong. When they had been wrong for an embarrassingly long time, they finally shifted to saying that we are headed for a “soft landing.”
A “soft landing” means that the economy will slow, maybe even stall, but avoid an actual recession. The description is often put forward by the press as something the Fed is trying to accomplish. The image they paint is the economy as an airplane and the Fed is the pilot. It is a very bad analogy; the Fed does not control the economy and neither does Congress or the president. I can still remember my college micro-economics professor stating boldly that the economy is more powerful than any government. I didn’t understand what he meant at the time, but I do now.
The economy is nothing more or less than the cumulative financial behavior of all the citizens put together. Regardless of government policy we are going to buy groceries, houses, cars, computers etc. This is not to say that policy doesn’t have an influence at the margins: We will spend more when we get to keep more of our income, we will start more new companies when regulations make it easier to start a new company, and we may buy a bigger house if interest rates are lower. These things do impact the margins. However, the main driver of the economy is its natural cycle.
Where most pundits went wrong is that they refuse to admit the reality of the recession of 2022. We had a recession is 2022, just two years after the self-induced recession of 2020. Therefore, we have been in the recovery phase of the economic cycle, which is as far from recession as one can get. It has been muted as recoveries go, due to the shallowness of the recession itself and really bad fiscal policy partnered with relatively restrictive monetary policy.
This explains why we have been right while so many others have been wrong. When the initial reading of first quarter GDP came in at 1.6 percent, I said we were still on course. I told several clients I would wager that the revisions of GDP would come in higher. I was wrong. The first revision came in at 1.3 percent. In addition, the Atlanta Fed’s GDPNow measure of real time GDP has dropped from more than 3 percent growth to 1.8 percent on June 3. We are still growing, but growth is slowing.
Is that enough to alter our outlook? Not yet, but it cannot be ignored, and it is concerning. We must be willing to change course if the data requires. This leads to the other problem with Wall Street pundits: The vast majority make up their minds as to what will happen and then look for data to support that conclusion. Thus, many well-paid Wall Street pundits live by the broken-watch-is-right-twice-a-day rule. If they just keep saying the same thing, then eventually they will be correct.
Jamie Diamond, CEO of JP Morgan, is one of the best bank CEOs in the world. He is very good at his job. I can’t tell you if he has made any economic predictions lately, but I can tell you that if he has, it was all gloom and doom. His cautious nature makes him exactly what one would want in a banker, but a really bad economic forecaster.
I have not read Fundstrat’s Tom Lee’s latest report, but I can guarantee it is bullish. How do I know? Because Lee is always bullish, and he continues in a long and distinguished line of Wall Street strategists who are permanently bullish.
The broken watch philosophy works for one’s career; those who are always bullish have the advantage of being correct the vast majority of the time, as markets generally go up. Those who are permanently bearish have the advantage of being right at the most impactful times, as losses impact us psychologically far greater than gains. How many times have you seen someone brag about predicting the last X number of market selloffs? They just don’t mention the hundreds of selloffs they predicted that didn’t happen.
We try to do things differently here. We try to be correct, and that means we have to admit when we are wrong so that we know when it is time to change our minds. It also means knowing oneself. I am naturally optimistic, so I continually remind myself to be cautious, and that starts with accepting the data instead of explaining it away. We have seen a slowdown in growth, and caution is in order.
Warm regards,
Chuck Osborne, CFA
Managing Director
