Can you talk yourself into a recession?
I believe the answer is yes, because you need confidence to take chances to keep your part of the economy growing and endless chatter about a recession can erode that confidence.
Is this the same thing as nothing to fear but fear itself?
Most definitely, especially when you are lacking as many signals about a looming recession as we are.
I have resisted discussion of how close we are to a recession because I focus on employment growth, customer spending and money demand.
All of these are incredibly positive. While we know that employment numbers are rearview mirror, there has been no let-up at all in hiring and I still think that shortage of workers is a bigger issue in this country than excess workers. In most states, it is still hard to find people to put to work.
Until these last two weeks, while I was never so cavalier as to dismiss a recession out of hand, I did think that job growth was too strong to believe that we could experience more than a slowdown. An economy is unlikely to go from 60 to zero in 4 seconds unless someone really pumps the brakes.
But in these last two weeks, we have seen some serious erosion in confidence as exhibited by the $40 trillion stock market's actions, that make bonds feel no different from a small capitalization short squeeze.
I was reading some of the usual criticism of me, and a new theme is that I have grown cautious after being positive not that long ago and that I change my mind on a dime.
This riposte is laughable. In fact, the bond market changed its mind on a dime and that's not supposed to happen. Not at all. We went from a bond market that had longer rates that were higher than shorter ones to a bond market where long rates shot right through shorter rates like a machete through butter.
As someone who used to trade bonds all of the time, I was shocked by the move because it was so out of synch with stocks, a market half the size of bonds.
But now stocks are confirming what bonds are saying, which is the unthinkable when you have the best unemployment numbers since 1969: The odds of a recession have now moved up, perhaps dramatically.
Why stay as positive in that scenario? Or, to put it another way, as someone who is regarded as close to the markets, I am now being inundated with questions about whether there will be a recession. I can't be as certain when a chief clue that I look at, an inverted yield curve, is now definitively saying we will have one.
Of course, I have said over and over again that the yield curve could be wrong. And I want to stick by that. However, confidence is being eroded, eroded by a Fed that tightened too quickly and has been too timid and not willing to own that error. Eroded by a trade war that's showing no signs of ending, even if you believe it has to be prosecuted. Eroded by a belief that a sitting president will be ousted if there is a recession. Eroded by the choices in the Democratic field, some of whom represent anti-capital strains of thought.
How do you talk yourself out of a recession? We can't. The Fed can. Jay Powell can come out today and say that he hears what the bond market is saying and if we need a new rate cycle that brings rates back down after so many increases, then we will have it. The president could cool the trashing of the Fed and try to come up with a way to take advantage of low 30-year rates to issue infrastructure bonds. And the media can stop the echo chamber that insists that a recession must occur and the bond market is never wrong.
If interest rates keep going lower, it might not matter. We will scare ourselves right out of an expansion. But at least the policymakers and those who opine will no longer create or sow fear when fear itself is the deciding element of whether we will have a recession or not.