Most seasoned investors have developed contrarian signals over their decades of investing. Some like overall investor sentiment, while others prefer the VIX. One of my favorite contrarian indicators is Paul Krugman, the noted economist who plies his trade primarily at the New York Times. While all pundits are wrong more often than they would like, when Krugman misses a call, he tends to be spectacularly wrong.
Back in the 1990s he likened the potential of the emerging Internet on the economy and markets to that of the fax machine. A dozen years ago he urged avoiding Bitcoin when it was trading for south of $10 apiece. He also famously ranted right after the 2016 election that the markets would never recover from Donald Trump being sent to the White House.
Last week, Krugman appeared on CNN where he postulated that the current economy is "surreally good." One of the more striking parts of the interview was the passage below:
"The striking thing, if you look at it, it's not just, you know, the economic data have been surreally good. I mean, even optimists are just stunned by how quickly and how painlessly inflation has come down. You know, no hint of a recession, at least so far, never know, but so far, inflation is not too far from the target of 2 percent and under 3 percent by most measures. And all of that just achieved painlessly."
I guess I should be more forgiving of his ivory tower take on the economy given his extensive academic background. I guess he missed the recent CNBC survey that showed 61% of Americans were living paycheck to paycheck. He might not have had time to read the latest census report showing the inflation-adjusted average income in the country dropped again in 2022 (down 2.3%) for the third straight year. Krugman also seems oblivious that full-time employment fell in each of the past two monthly reports by the Bureau of Labor Statistics, that part-time jobs are surging and a record number of Americans are working at least two jobs to make ends meet thanks to inflation rising by more than 17% since the beginning of 2021.
Krugman should be aware that the monthly leading economic indicators have declined for 16 straight months now, or that the personal savings rate has plunged to 3.5%, a level that hasn't been seen since the aftermath of the Great Financial Crisis. It is possible he doesn't realize that all the excess savings from the Covid pandemic have now been spent and Americans have piled up record amounts of credit card balances and auto loans in order to maintain spending levels.
The challenges of the average consumer easily would be apparent just by chatting with your local baristas, bartenders, Uber drivers and small business owners one encounters every week. They also could tell you about their financial worries and how inflation has impacted them. It is something I do several times a week. But, then again, I am not a real economist, but just an investor who has my ear to the ground.
The point of this piece isn't to badger Krugman but to highlight how too many people who should know better appear to be overlooking the multiple potential land mines that are scattered throughout the economy and the equity markets. I believe the best-case scenario in the quarters ahead is a bout of stagflation, or slugflation as Doug Kass would call it. The potential for a recession, and potentially a significant one at that, seems to be deeply discounted as well.
If neither happens by the second quarter of next year, I have no problem writing a column around how I got my economic outlook so wrong. However, given the reliability of one of my favorite contrarian indicators, I doubt that is a piece that will ever get penned.
