Irving Fisher was as cultured and versatile as John Maynard Keynes and, as an economist, he was even more fruitful. Many of Keynes's ideas were reworkings of concepts previously advanced by Fisher, who saw the furthest of all on debt deflation, a theme that has come back up to date in our times. Yet today, in common feeling, Fisher is associated with the world, which appears to us very distant, which preceded 1929, while We see Keynes as one of the founders of our world, born economically on the ashes of the previous one. Fisher's damnatio memoriae probably has a lot to do, at least among non-economists, with his predictions, blatantly denied by the facts, on the eve of the crash of 1929 and in the first months of what we know today as the Great Depression.
If Fisher failed to see the drama that was looming, there must evidently be something deeply wrong with the theories of his era, to which he had contributed so much. But what did Fisher say so badly on October 15, 1929, nine days before the collapse? He said the stock market had reached what could be considered a permanent plateau. And what did he add on October 21st to go down in history as a symbol of his time blindness? He said the shares weren't expensive and still had room to go up. In December 2003, two professors of the Minneapolis Federal Reserve (one of the two was Edward Prescott, who would receive the Nobel Prize a few months later) published a study (The 1929 Stock Market, Irving Fisher Was Right) which demonstrated that, on the basis of profits that were actually made that year, the New York Stock Exchange, even at its peak, could also be considered slightly undervalued.
The undervaluation was even more evident in terms of assets. The capitalization on the eve of the crash was in fact equal to the value of the tangible assets of the listed companies, but it valued the intangible assets as zero, which are not an invention of our days but existed even then. Therefore, according to the authors, it was not the great rise of the XNUMXs followed by the inevitable collapse that set the Great Depression in motion, but the reckless fear of the Federal Reserve who, unable to correctly evaluate the stock market, became frightened by the extent of the hike and began to raise rates until they caused the collapse, first of the markets and then of the entire economy. A collapse that was then exacerbated by further monetary policy errors in the following years. The story offers us the starting point for two considerations.
The first is that the best analyzes done with the best of good faith never manage to take into account all the factors involved. The second is that the supposed rationality and omniscience of policy makers is never to be taken for granted. The fall from grace of the Fisher who launches into market considerations has not, historically, been limited to the idea that 1929 stocks were undervalued, but has naturally extended to his prediction that, once he rises again, the market will would settle on a permanent plateau. The memory of that unfortunate sentence still makes it difficult for any analyst to hypothesize market plateaus. And we're not just talking about permanent plateaus, obviously unthinkable because nothing permanent exists down here, but also plateaus of some limited extension and duration, which have become, ex ante, a great untouchable, unmentionable and inconceivable taboo. Markets go up and then they go down.
After all, for at least forty years, we have not seen large increases followed by lateral phases, but only by large bear markets. Or not? One exception, to tell the truth, we have before our eyes and is made up of the European stock exchanges, essentially flat on a plateau for three years. Even the Japanese stock exchange, in the previous four years Abenomics, from the beginning of 2009 to the end of 2012, experienced a long lateral phase, even if in his case it was a lowland. Today no house foresees sideways markets for the next three years (beyond three years, as Powell said yesterday, it is almost impossible to make forecasts). The laws of the spectacle, which also apply to analysts, require us to choose. Either the mannered and ex officio optimism of consensus (the usual annual rise of 5-10 per cent which has never compromised any career) or the daring wager of a collapse, which is noticeable in any case and, if reveals exact, guarantees a few years of rich consultancy.
Yet, looking at the Fed's estimates just published, there could also be a lateral phase. On the one hand, there is good growth, revised upwards, but without the risk of overheating. On the other, slowly rising inflation, a Fed that is behind it by raising rates at a regular pace and without getting too frightened if for a few months the threshold of 2 percent on prices or 3 on the Fed Funds is exceeded. All in a context of gradually shrinking liquidity, offset however by a rest of the world that continues to grow. Seen things like this, there are no elements to hypothesize either large increases or large decreases. The headwinds have now picked up and will continue to blow, but the economy is robust enough to carry on anyway. What could prove a lateral phase prediction wrong? A million things, of course, starting from the fact that the estimates of the Fed we are talking about are not those of the central staff, but those of the regional Feds, often represented on the board by lawyers or businessmen, good at grasping the moods of their region but sometimes weak when it comes to econometric models.
Then it must be considered that no central bank will ever predict a recession in its official estimates for the simple reason that, if it did, it would act in advance to prevent it. Yet recessions do happen and that means the estimates are sometimes wrong. A central bank is unlikely to raise rates to cause a recession. With every increase there is the belief that the economy can handle it and instead sometimes it is not. Then there are unknowns related to positioning, geopolitical factors, sudden reconsiderations of sectors (like the technology in this phase) which from enthralling become a burden and bring down the whole market. It happened in 2000 and could happen again, albeit in an attenuated form. In the short term, fortunately, visibility is a little better. The correction that began on February 25 is starting to bite again and will continue until it has purged the market of any remaining complacency. The equity correction will give
temporary support for long bonds and it will be good to take advantage of this to sell them.
Even with all the difficulties that have arisen in recent weeks, 2018, as a whole, does not seem to be a year of significant negative results. At some point, US earnings growth, estimated at 20 percent and so far unchallenged, will weigh in again. A summer of recovery will therefore be possible. The end of the year, however, will not necessarily be so positive. The US elections and the outlook for 2019 earnings with much lower growth will weigh. Eventually we will record maybe flat bags. It doesn't happen often, but sometimes it happens.
