August is rolling on its final days and the air of September uncertainty is already here, depressing the markets, and feeling as if the winds of change are not likely to come anytime soon. Investors are again hoarding cash or flocking to the safety of bonds. Equity markets appear to be in a permanent red zone and no one is even mentioning recovery anymore, let alone cheering when a few positive data sprout here or there.
Last week, we learned about U.S. retail sales edging slightly higher in July, the first time in the past three months. The U.S. consumer confidence also rose somewhat, albeit beating analysts’ estimates by a narrow margin. After months of such lukewarm performance, most of the headlines celebrated little, except that the economic data published last week were not completely awful.
So, there is doom and gloom galore. As “The Wall Street Journal” survey of 53 economists summarized it, there are “too few jobs, too little wage income and too little consumer spending.” It seems we all have a good and realistic handle on the big picture, but little or no understanding of what is likely to happen next.
After the almost collapse of the global financial system less than two years ago, there have been many new “economic prophets,” forecasting everything and anything, from interest rates to equity prices to inflation to deflation. Their views are often as divergent as they could be. Yet, learning the hard way from recent history, a remarkable number of the prophets are likely to be wrong. I suppose having the information is not everything.
Perhaps it is time to acknowledge that the future cannot be predicted and that, these days, not even educated guesses are likely to cut it. Your throw of the dart at the board could be just as good as the throw of any of the smartest guys in the room.
If we were to give up on the economists, what about the politicians? It seems they are all talking the good talk. However, at some point, the survival instinct is going to kick in. Come election times, no one is going to preach absolute truth and nothing but the truth, because such truth is ugly and scary and can cost them votes. In the end, the government is more likely to succumb to the time-honored tradition when dealing with black holes on the balance sheet, which is to crank up the printing presses and inflate its way out of debt.
We have learned little from our history, it seems. Policy mistakes have happened, are happening, and will continue to happen. We’re reliving one of them right now, with world governments each going about spending reduction their own way, sometimes a misguided one. But that is the reality. If indeed the effort is there, as the need certainly is, to reduce government spending, then everyone, from consumers to investors to business, must understand that the recovery is likely to lose momentum, unemployment will remain high, and consumers will entrench themselves in the back rows.
At the same time, if governments plagued with sovereign debt continue straining their threadbare balance sheets with more spending, they are bound to get their rude awakening sooner rather than later. Just because the bond markets are keeping quiet about the budget deficits and ultra-low-interest-rate environments, it does not mean they will stay so indefinitely. Because, if and when the bond markets become unhappy, they will do so without a word of warning and will do so viciously. Just look what happened to the Greeks. They received no heads-up either.