7 April 2020
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Are economists and journalists killing confidence?

By Peter Switzer

Who’s worse — economists or journalists? That’s the question I have to ask after listening to a US business television journalist tell her audience that Citigroup says China will drag the world economy into recession!

Keen to know the name of the economist or nincompoop who’s running with this argument, I went to my friendly search engine and found out that it was Citigroup’s chief economist in the US, Willem Buiter.

This is a big call but economists have become media tarts, searching for headlines to attract attention. Not all economists go for the big speculator call. Many give us their best guess, others explain things we miss in the headlines and some offer really perceptive observations. Others, and let’s be frank here, are media tarts.

What about Willem then?

Well, tracking down his actual call, I find that he says there’s a 55% chance of China dragging the world economy into recession. So he didn’t actually say China will drag us into recession, as the TV journalist told me. No, Willem says it’s 50:50!

Yep, I can say that there are a lot of 50:50 issues out there. For example, unemployment in Australia could rise or fall next month. We might get a Santa Claus rally in December for stocks but then again, we might not!

Buiter says China is growing at 4% not the 7% the officials in Beijing are telling us and emerging economies are struggling, with much of this linked to a weaker China.

Bloomberg says Willem is an outlier, which is code for being a big call merchant and these guys get a lot wrong but they do nail some big calls that feeble-minded journalists will remember and continually talk up.

A case in point was Nouriel Roubini, who got the GFC call right but if you’d listened to him and all his scary talk, you would’ve stayed in cash, earning less than 3% nowadays! If you had $1 million in late 2007 all in stocks, you could’ve had $500,000 by March 2009, when the stock market turned around!

By sticking with an ETF for the S&P/ASX 200, if you invested $500,000 in March 2009 it is now 60% higher from capital gain, and that’s after a bad year so far in 2015. But if you throw in dividends and franking credits, you’re up 100% since the post-GFC rebound or damn close to $1 million again.

By the way, that $1 million you’d created in the stock market was way too big anyway — a function of a stock market that had over-rewarded — so if you’re now back to $1 million it’s not a bad result.

If you’d listened and believed Nouriel, my mate Steve Keen and a whole pile of doomsday merchants out there, and stayed with term deposits, then you’d be lucky (and I mean really lucky) to be back at $700,000.

On Monday, one of our best economists Warwick McKibbin from the ANU said China was in good shape! The boss of the US-based international investment fund, Pinebridge Investments, Michael Kelly, is not looking out for a looming recession and thinks we’re in a slow grind higher cycle.

Central banks and governments are fighting against the recession threat. One day, they will lose, when they let interest rates rise and when a government like the one in China runs out of fiscal firepower. However, that won’t happen for some time.

By the way, Chinese businesses are borrowing at rates around 8% so monetary authorities still have plenty of cutting room, so I’m not a Buiter-believer, right now. One day, he will be right but if it’s not next year then he’s on the queue to one day be called a media tart!

This week, our journalists made great play with the falls in business confidence but didn’t play up the following:

  • Employment up 17,400 when 10,000 was expected, as unemployment fell from 6.3% to 6.2%
  • 235,000 jobs have been created in one year, which is the best growth in four years.
  • Business conditions across the country spiked from 6 to 10.7 — a 10-month high — but in NSW it went from a good 9 to a huge 22 and this is for Australia’s biggest state economy.
  • Job ads rose 1% and have gone up 12 out of 14 months. In trend terms, it has been rising 21 straight months!

Journalists looking for a headline are the worst of the two but economists are often accessories before the fact.

I know I get accused of being excessively positive but I argued that QE would work and we would avoid a worldwide Great Depression. I argued that Australia would avoid a recession and we did. I argued that stocks would rebound early in 2009. I maintained the faith in stocks as the US was debt-downgraded and even tipped Europe would slowly improve, after Mario Draghi promised to “do what it takes”. I even bagged the RBA for keeping rates too high for too long and they eventually gave in and cut rates.

And I have always been a “buy the dips” guy and nearly every time I was in a small minority when it comes to journalists and often economists. However, I often had industry experts supporting my views, which gave me confidence that I was right.

Despite some challenges now, I think Willem is wrong and we will see China do OK and the global economy will keep crawling higher. One day, we will have another recession but we still have time to make money out of stocks, so be a dip buyer until then.

For Wall Street watchers, the Dow was up 76 points but until the Fed raises rates, we will see a lot of up and down days. Get used to it and be wary of headline-seeking economists and journalists.

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