It’s been ten years since the financial melt-down. It’s been seventeen years since 9-11. And it’s only been a year since the presidential inauguration (seems longer, doesn’t it?). Kind of puts things in perspective.
Recently I attended an economic update from the Booth School at University of Chicago (my alma mater). The best gift I received from my education there was the skill of critical thinking. I value the Booth approach of evidence-based, disciplined investing. In fact, it’s part of what drew me to join Buckingham Strategic Wealth recently where that approach flourishes.
The Booth economic briefing is an annual tradition where noted academics weigh in on what’s going on with the economy, the government, the stock market and other relevant issues. Always fascinating and enlightening. Here’s a quick look at who was on the panel this year. All are professors at the Booth School that now boasts three Nobel Prize winners on the current faculty.
- Raghuram Rajan: Former Governor of the Reserve Bank of India, past Chief Economist and Director of Research for International Monetary Fund (IMF).
- Randy Kroszner: Former Fed Governor and current consultant to the U.S. Treasury. Former member of the Council of Economic Advisors under George W. Bush.
- Austan Goolsbee: Former Chairman of the Council of Economic Advisors and a member of the cabinet under President Obama.
The panel is diverse representing a cross section of political and world views. Here’s a glimpse of what they had to say:
Could we see a repeat of the 2008 meltdown today?
None of the panelists felt a major pullback was likely right now. There are clearly stress points and we could have a milder correction, but much progress has been made. There is more awareness of liquidity across markets, better sharing of information domestically and globally, and the central banks have managed the aftermath of the financial crisis relatively well.
What should we be watching?
The low levels of volatility are worth keeping an eye on. Complacency could become a concern. The shadow banking system is still a risk. Rising levels of leverage could eventually become a problem. Leverage was described as the “tinder.” The Central banks could set the fire. Something like tariff wars could light it.
What insights can we take from the past decade and what does that tell us about the future?
Rajan made the humble observation that economists can make the mistake of thinking they understand why things happened. That may or may not be true.
Goolsbee is concerned that we may not see the anticipated growth that the tax law implies. We may not achieve a 3% GDP and the Fed could get too ambitious in raising interest rates.
Kroszner took a positive view of the “trickle down” effect of the new tax law. Companies are announcing bonuses for employees making less than the highest salaries, minimum wages are rising, and hiring will continue to increase in an already low unemployment environment.
Other topics of interest?
If we see a presidential impeachment, would that hurt or help the stock market? The panel represented a variety of views. The stock market didn’t react strongly during the Clinton impeachment proceedings, so it could respond that way again. Some felt there could be relief from the unpredictability of Trump’s remarks, pushing the market higher. Of course, no one really knows.
What effect with Bitcoin or crypto currency have going forward? The standard answer to this question is that the underlying technology is quite interesting and could be a game changer, but the actual products so far are not stable enough. Kroszner made the point that crypto currency is more of an asset class than it is a currency. Several panelists emphasized for this to become more accepted, it would need to have regulation by central banks. And flying under the radar is much of the appeal with this asset class, so that could be problematic.
Will inflation heat up? While we may see the Fed pick up the pace of interest rate increases, it still doesn’t look like inflation will be an immediate problem. They are still trying to get to the target rate of 2%.
Will the bull market continue? There are no signs of an immediate recession. What is likely is that we will see low stock and bond market returns for some time (this past year is quite unusual). That means investors will need to save more aggressively to be able to meet their goals.
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