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2020 foresight


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2020 foresight

Nancy Bush is a veteran bank analyst. The following does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence.

Well, it had to be 2020. That is the thought that keeps popping into my head every time that I hear a Wall Street economist or other investment pundit pontificate that while things may seem fine right now and the economy may be perking right along, all this is going to grind to a screeching halt in 2020. The argument for imminent recession seems to fall upon these lines: The Fed will push rates up too far and too fast, the business cycle has gone on for too long, tariffs will begin to bite consumers and slow personal consumption, the stock market is overvalued and set for a correction and will drag the economy down with it, and on and on.

The year 2020 and the maintenance of a well-performing economy at that time are topics of intense interest to me, as on Feb. 19 of that year I will become fully Social Security-eligible and therefore — theoretically at least — able to retire. Whether or not I will take that momentous step at that time is not yet set in stone or entirely clear in my mind, but I must admit that it's fun to fantasize about a life in which I will be able to wake up in the morning and think about all the things that I might want to do that day. Should I devote the day to gardening, or to working on the house, or should I finally drag out that guitar I bought ages ago and start learning how to play it? No perusing the pre-market data, no looking for news items on my companies, no need to be glued to the TV for the latest overnight developments in emerging markets — just a cup of coffee and two hungry dogs (and two disgruntled cats) waiting for breakfast.

The trick is, of course, how to leave a career that has gone on for close to 40 years and has involved some periods of living in rarified air, indeed. Living the "life" on Wall Street was at one time pretty pleasant, especially in the era when entertaining clients was still a part of marketing and lunches and dinners at places like Le Cirque and La Côte Basque were part of the routine. Then there was the conference circuit, including annual bank analyst meetings in South Florida and Boston, and it was easy to tack on a few extra days for sightseeing and fun. And in the old days — those days prior to the events of 9/11 — there was a collegiality and fun within the bank analyst community that has given way to the cutthroat competition and general joylessness of today.

But every retired securities analyst that I have known has retained those characteristics and habits that marked their careers, and I don't expect that I will be an exception to that observation. I was very fortunate to have been mentored in the early years of my career by some of the best "stock jocks" on the Street, and investing in stocks (and not just bank stocks) is second nature to me. I always have to laugh (sometimes out loud) when investment managers talk to me about the need to begin to trade out of my stocks for bonds, start to ladder maturities, etc. When I ask what will happen if inflation goes up more than expected — and stocks are, after all, the one asset class that partially protects investors from loss of purchasing power — I generally get a blank look. Yes, I might buy a bond or two, but for me, dividend-paying stocks (and not in ETF form) are still the way to go, and analyzing them is likely to be a lifelong habit.

As I wrote in my last blog post, I am in general agreement with the thesis that a recession is likely somewhere on the intermediate horizon, but I am a bit mystified by the certainty with which the 2020 start of the downturn is being thrown around. Recessions do not generally adhere to a timetable, and predicting the start of the next one with any degree of certainty is a fool's errand. I would also note that events on the ground can and should change those forecasts, but the predictions of a 2020 starting date seem to have gained a life of their own and Wall Street groupthink seems to have kicked in big time at this point.

I saw a very interesting interview with Chicago Fed President Charles Evans on Oct. 3 on Bloomberg TV, and Mr. Evans was able to add some of his invaluable historical perspective to the issues facing the economy and the Federal Reserve. I have always held him to be one of the more credible Fed presidents — as opposed to Minneapolis Fed President Neel Kashkari, to name one who seems always to have his eye on his next big gig — as his Midwestern politesse and plain manner of speaking give him an air of approachability not enjoyed by some of his Fed colleagues.

Forgive me for wearing my rose-colored glasses, but I did not hear anything from President Evans that screamed "recession in 2020." He spoke of the need for rates to rise further — and thus set off a significant market correction the next day, sparked by a rise in yields on 10-year Treasuries to (gasp!) 3.20% — but his overall implication was that the Fed was satisfied both by the path of rates and by the long-term outlook for core inflation. The one cautionary note that he sounded was that markets perhaps did not yet fully appreciate how high either inflation or rates might go in the near term as the Fed seeks the right balance of rates and growth, but my bet is that the markets have now begun to absorb that message.

He also was able to add some perspective to the subject of asset bubbles and whether they inevitably lead to economic doom. He pointed out that the bursting of the tech bubble in 2000 may have led to a recession, but that it was a mild one due to the fact that there had not been excessive leverage in the system. On the other hand, the bursting of the housing bubble in 2008 came at a time that everyone — individuals and banks alike — were up to their eyeballs in debt, thus the depth of the recession and the extent of the panic. He does not see excessive leverage in the system now (he sounded sincere in that view) and told interviewer Guy Johnson that it was his view that asset and market levels are therefore likely sustainable.

It's also been interesting in the past few days that I have heard more than one mention of the fact that Fed Chairman Jay Powell is not an economist but is an attorney, with the implication that the Fed under his direction might go too far in raising rates and push the economy over the cliff. I guess we should ignore the fact that Jay Powell is surrounded by professional economists and has input from some of the best financial minds on the planet. I also find it amusing that many of these same pundits bemoaned the moribund state of the economy and the endless low rate environment under Janet Yellen — and often pointed to her lack of real-world business experience as a negative.

I'm resigned to the fact that 2020 might be a tumultuous year for a whole lot of reasons. If the past two weeks are any indication, the presidential race in 2020 will come to resemble a steel cage match, and the result will be equally nasty and bloody. The coming economic war with China may actually come to more serious blows in the next two years, and cyber-war with Russia is also beginning to look like an equally nasty possibility. So perhaps a recession in 2020 might be a likelihood for reasons that have nothing to do with Fed policy — and for me, gardening and guitars may increasingly come to look like a very palatable escape.