The Confrontation With Iran Drones On

Just when you think your crystal ball is a bit clearer than usual, events intrude to fog it up. It is now more difficult than ever to decide what the U.S. economy, indeed the global economy, will look like tomorrow, much less in the year that is about to break upon us. All will depend on two actors, neither famed for predictability: Donald Trump, and the Ayatollah Khamenei. The range of possible scenarios is limitless, making it difficult for investors, businessmen and economic forecasters to guess which items on the menus before them these adversaries will choose.
I have always thought that we will some day once again see the unsheathing of the oil weapon, especially when our overly indebted shale industry runs out of cash and credit with which to drill much-needed new wells, leaving OPEC with greater power to drive prices up by curtailing supplies. That’s still a runner but only one of many possibilities available to Iran. Of which all-out war is unlikely to be selected. One well-informed Iranian expatriate tells me that the Ayatollahs know that America and Israel can wipe Teheran off the face of the earth if things get really nasty, and have no desire for martyrdom. Let’s hope he is right.

One thing has not changed with the death-by-drone of Major General Qasem Soleimani: the need for some way to make sense of the US economy’s most likely path in 2020. Recall that the twin towers were hit in the latter part of 2001. The stock market, when it re-opened, was down 14%. One month later, prices had recovered to their pre-9/11 level. The economy grew at annual rates of 1.8% and 2.8% in 2002 and 2003, respectively.

Whether this exercise in resiliency will be repeated we do not now know. But it is certainly not a good idea to bet against it. My best guess is that we should think in terms of deuces wild; 2-2-2; 2% growth, 2% interest rates, 2% inflation as we go about our business.

In the coming year some 5.5 million Americans will buy existing homes. To make such a move, they will have to forecast their incomes, the likely future value of those homes, and whether interest rates on their mortgages are lower now than they will be in the future. On the other side of these deals, some 5.5 million sellers will have to forecast whether holding out a bit longer might give them a larger cash pile with which to purchase their next home, or increase whatever funds they have set aside for their retirement.

Some 17 million Americans will buy or lease a new car, most likely a sports-utility vehicle (SUV). Realize it or not, they will be forecasting not only their financial ability to take on such a cost, but also whether their jobs are likely to withstand whatever disruptions loom, whether gasoline prices will remain at current low, affordable levels, and whether electric vehicles will eat into the trade-in value of their vehicles in the next three years or so.

My best guess is that they will proceed with these plans. I recall returning to mid-town Manhattan from a police-organized visit to Ground Zero a few days after the Saudi-driven planes hit the World Trade Center. The only visible abnormality was us — my wife and I. Our clothes so reeked of that smell of smoke, white ash and death that shoppers — yes, shoppers — stopped to tell us they knew where we had been. Most were following the advice of Mayor Rudy Giuliani — this was before his fall from credibility — to return to normality.

Of course, unsettled consumers and investors can look to the experts for guidance, experts who, as you read this, are frantically trying to jigger their models to learn what the future holds. But as Emanuel Derman, a former Goldman managing director, now head of Columbia University’s program in financial engineering, points out in his “Models Behaving Badly”, “Economic Models have misfired and financial models have proved to be enormously inaccurate. Economists … whistle in the dark while they write their regressions that ignore the humans behind their equations.”

My suggestion would be to follow the advice given years ago by Philip Tetlock, professor at the University of Pennsylvania’s Wharton School. He put it this way, “I believe it is possible to see into the future, at least in some situations and to some extent, and that any intelligent, open-minded, and hard-working person can cultivate the requisite skills.”

What is to come in the next few weeks and months cannot change two fundamental facts. First, consumers account for about 70% of economic activity, and so far have responded to full employment, lower taxes, and rising wages by spending at a rate sufficient to support reasonable if not spectacular economic growth. The most likely although not sure bet is that they will continue to do so.

Second, the recent easing of trade tensions — the so-called Phase One deal with China, scheduled for signing on January 15th — is not likely to be derailed. Both Trump and Xi Jinping need this deal for domestic political reasons. Trump has an election coming up, and needs accomplishments with which to taunt those who have impeached him, and to assure his core followers that he can still govern. Elections are not the sort of thing about which Xi loses any sleep. But he is presiding over a slowing, debt-ridden economy, and would not want a postponement of the signing to offset the stimulus he is instructing his banks to provide.

It is not unreasonable to guess that as 2020 wears on the U.S. election will be the major event affecting the American economy. Should Bernie Sanders, Elizabeth Warren or one such “progressive” emerge from the current scrum and the Democratic convention as the challenger (1) markets will panic, consumers zip their purses, and the economy will nose-dive, or (2) markets will be so certain of a Trump landslide that share prices, consumer and CEO confidence will soar and the economy take off like a rocket. My guess is that your guess will be a function of your planned vote in November.