\u201c\u2026a nagging fear that America’s decline is inevitable\u2026the next generation must lower its sights.\u201d (January 20, 2009, Barack Obama,)<\/p>\n
\u201cThe bubble has burst\u2026this is a once-in-a-lifetime economic event\u2026a fundamental economic reset.\u201d (February 2009, Steven Ballmer)<\/p>\n
\u201cthe new normal\u201d and \u201cpotent cocktail \u2013 a self-reinforcing mix of De-leveraging, De-globalization, and Re-regulation\u2026 that disrupt the normal functioning of markets and the global economy.\u201d (May 2009, Mohamed El-Erian)<\/p>\n
On their face, recent events would seem to confirm what these eminent seers declared back in 2008 and 2009: capitalism, particularly in the developed economies, has descended into a \u201cnew normal<\/a>\u201d considerably less appealing that the buoyancy of the 50 years following World War II. Some straws in the wind:<\/p>\n \u00b7 The 2010 book, The Great Reset<\/i><\/a>,<\/i> by Richard Florida is a prominent expression of the view that we are in a \u201cnew normal.\u201d In essence, he argues that the Global Financial Crisis has triggered a reaction to the pervious era of unbridled consumerism, aggressive use of debt financing, winner-take-all corporate management, and so on. Though Florida does not court embarrassment by making an economic forecast on which an investor could act, he does argue that this reaction will be a long period of austerity not unlike the Great Depression (1931-1940) or the Long Depression (1873-1896) in American History.<\/p>\n \u00b7 Prominent economists such as Robert Gordon, Tyler Cowen, Carmen Reinhart, and Kenneth Rogoff suggest that America may be in for a long slog of slow growth\u2014I summarized their messages in a recent blog post<\/a>.<\/p>\n \u00b7 John Boehner, Speaker of the House, gave a speech<\/a> last week in which he mourned the \u201cnew normal\u201d economy that America faces and advocated every business and person to create wealth.<\/p>\n \u00b7 At the other end of the political spectrum, Senator Bernie Sanders decried the \u201cnew normal\u201d and wrote<\/a> in the Guardian <\/i>that \u201cWe must not be content with an economic reality in which the middle class of this country continues to disappear, poverty is near an all-time high and the gap between the very rich and everyone else grows wider and wider.\u201d<\/p>\n \u00b7 Trustees of pension plans and charitable endowments foresee mid-single digit returns on a diversified portfolio of investments in the future. This prompts them to propose cutting the typical investment draw rate, 4.5%, to something much lower, saying \u201cget used to it; it\u2019s a new normal.\u201d<\/p>\n \u00b7 The following graph shows the mentions of \u201cnew normal\u201d in periodicals in recent years. Plainly, \u201cnew normal\u201d is a meme,<\/i> an idea that appeared with the collapse of the Internet bubble in 2001 and really surged in 2009. By now, it is an idea firmly rooted in the public consciousness.<\/p>\n Readers of this blog have seen my agreement that our recovery from the Great Recession will be slow. We are likely to return to higher employment that we experienced before the Global Financial Crisis only in the latter part of this decade. Certainly, our slow recovery to date is consistent with Richard Florida\u2019s forecast in 2009.<\/p>\n I don\u2019t have a crystal ball; and anyone who claims to have a crystal ball is lying. I do worry a bit when there is so much unanimity in a diverse population. Perhaps the unanimity is proof of \u201cnew era\u201d thinking and a signal that conditions are about to change.<\/p>\n In a recent post<\/a>, I highlighted \u201cnew era\u201d thinking as a very important foundation of a market bubble\u2014we can generalize \u201cnew era\u201d thinking to be an attribute of major economic turning points, in the opposite direction<\/i>. Research<\/a> documents the tendency of markets to \u201covershoot\u201d or overreact to changes in the economic fundamentals. For instance, retail investors tend to sell out well after the \u201csmart money\u201d and after prices have subsided to a level consistent with rational valuation; this added selling causes markets to \u201cundershoot,\u201d driving prices below levels consistent with a realistic outlook. There is a similar tendency for retail investors to buy in during the late stages of an economic expansion.<\/p>\n I wonder whether the ubiquity and persistence of the \u201cnew normal\u201d meme signal a \u201cmarket top\u201d for this idea. In recent years, Jeremy Grantham, a iconic investment manager, has been almost Cassandra-like in warning about the perils of the \u201cnew normal.\u201d But in his most recent investment letter<\/a>, he acknowledges \u201ctwo trends that might just save our bacon.\u201d His dour letter won\u2019t prompt dancing in the streets, but it certainly suggests a sea-change.<\/p>\n What are business leaders and investors to do with the concept of the \u201cnew normal\u201d? Here are some suggestions:<\/p>\n First, challenge anyone who uses the phrase (your chief of forecasting, perhaps) to define it in any rigorous way.<\/b> I\u2019ve tried this with a cross-section of business practitioners and gotten some pretty mushy replies. Here\u2019s the best I can say: a \u201creset\u201d embodies the consciousness that this time it really is \u201cdifferent.\u201d <\/i>The \u201cnew normal\u201d as triggered by a \u201creset\u201d is a downward step-change in welfare, outlook, and self-confidence. A \u201creset\u201d is transformational: big, costly, enduring, pervasive, and unanticipated.<\/p>\n The power of \u201cnew normal\u201d and \u201creset\u201d may be their usefulness to leaders in mobilizing constituencies at both ends of the political spectrum. The Left has harnessed this meme to motivate a stimulus funding program, health care reform, and re-regulation of the financial services sector. On the Right, the meme underpins a spirit of regime change displayed by Tea Party and Libertarian candidates who argue that most of what the government does is unaffordable now and in the years ahead. Thus, the meme has influence in the way that Humpty-Dumpty told Alice in Through the Looking-Glass<\/i>:<\/p>\n ‘When I<\/b> use a word,’ Humpty Dumpty said, in a rather scornful tone,’ it means just what I choose it to mean, neither more nor less.’ <\/i><\/p>\n ‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’ <\/i><\/p>\n ‘The question is,’ said Humpty Dumpty, ‘which is to be master – that’s all.’<\/i><\/p>\n Next, it is worth asking, \u201cIs this it? Are we in a \u201creset\u201d?\u201d<\/b> Without a rigorous definition, how can we tell? The proponents argue that we are <\/i>in a reset because it started with a bank panic, like other resets. It is global in scope. There is clear job destruction. The recovery is slow and is accompanied with a big transformation in various industries, such as housing and finance.<\/p>\n But on the other side are some possible objections. We have seen many bank panics and relatively few \u201cresets.\u201d The appearance of a panic in 2008 is not a perfect predictor of the next reset. Though the Global Financial Crisis rippled around the world, some regions (China, India, Brazil) remained buoyant for a considerable time. Though housing and finance were badly damaged in the crisis, sectors of the economy such as energy and health care showed relatively little harm. Though unemployment is worse than in many previous recessions, it remains a matter of considerable debate as to whether the unemployment is structural in nature, or purely cyclical. Deleveraging always <\/i>occurs after a financial crisis. Anyway, when hasn\u2019t <\/i>the U.S. economy been in some stage of transformation?<\/p>\n Third, one should ask, \u201cIs this \u201creset\u201d like other resets?\u201d<\/b> The following table offers a profile that so far does not look much like the Great Depression, Long Depression<\/a>, or the depression of the 1890s. The recent crisis and recession stand out for the very slow recovery, but not for the depth of the damage.<\/p>\n <\/p>\n It\u2019s a stretch to imply that the present \u201cnew normal\u201d compares to earlier depressions. The current situation lacks the pervasiveness of antecedents. Nevada and the city of Detroit are devastated; Utah and Washington D.C. are not. Greece, Iceland, and Ireland are plainly in deep distress, but China and India have been relatively buoyant. Industries such as housing, financial services, and print media were hurting, but oil & gas, health care, agribusiness, and information technology barely broke stride.<\/p>\n The present social and political environment doesn\u2019t compare well to historical examples. We have had rallies in Washington, Occupy Wall Street, and Tea Party populism, but have yet to see a populist presidential hopeful on the order of William Jennings Bryan (1896), the demagoguery of Huey Long and Father Coughlin (1930s), Coxey\u2019s Army (1894), the Bonus Army (1932), the violence of the steel and Pullman strikes (1894) or the Molly Maguires (1875), and long bread lines of the Great Depression. Such kinds of events may yet appear in this cycle, but until they do, how can one be certain that we are now in \u201creset\u201d? Pundits hopefully suggest that a political regime change is imminent in 2014 or 2016, though such is not unusual for the second term of a Presidential administration.<\/p>\n To be sure, the present high unemployment, low growth, fragility of the recovery, and fiscal deficits of the U.S. are serious, unsustainable, and unacceptable. They could unravel into another correction and serious social unrest if not reversed soon. In this sense, perhaps the events of 2007-2010 could better be labeled a \u201cpreset,\u201d a precursor to a much bigger realignment that awaits the U.S. economy if fundamental problems remain unaddressed.<\/p>\n Fourth, one should ask, \u201cIf we are <\/i>in a \u201cnew normal\u201d triggered by a \u201creset,\u201d when did it start?<\/b> Most pundits reply that the \u201cnew normal\u201d was triggered by the Global Financial Crisis of 2008-2009. But there are very plausible alternatives:<\/p>\n o 2001? Internet bubble pops, Enron, 9\/11.<\/p>\n o 1989? Collapse of Soviet sphere; \u201cend of history.\u201d<\/p>\n o 1973? First oil shock.<\/p>\n o 1971? Abandonment of Bretton Woods system.<\/p>\n Economic historians some years from now will earn their pay trying to parse the actual onset of the \u201cnew normal\u201d from the alternatives. Suffice it to say, if we can\u2019t pinpoint the beginning, how can we be so sure of the ending, or even the very existence of the \u201cnew normal\u201d?<\/p>\n Finally, one should fight acceptance of the \u201cnew normal.\u201d<\/b> Some folks I\u2019ve met express a weariness with the slowness of the recovery: \u201cNew normal? So be it.\u201d But this is defeatism. It is in no one\u2019s interest for America to sustain the \u201cnew normal\u201d for very long. James Pethokoukis argued this in a blog<\/a> :<\/p>\n So what to do? One option is acceptance. Accept that we will never fully close the growth gap or income gap or jobs gap. Accept that unemployment will never return to the levels of the Bush and Clinton years. It\u2019s time to move on and be grateful that America avoided an outright depression and isn\u2019t suffering recessionary relapse as Europe is. The Dow and S&P 500 are making records, and home prices are again rising. Slow and steady is better than bubbles and busts, right? Forward!<\/p>\n The other option is defiance. Refuse to embrace the \u201cnew normal\u201d reality. Refuse to lower expectations of what America can be. As Larry Kudlow likes to say, \u201cGrowth, growth, growth!\u201d<\/p>\n Next November 14 and 15, Darden will host the sixth annual University of Virginia Investing Conference.<\/i><\/a> <\/i>The theme of the conference is \u201cFinding Opportunity in an Unpredictable World\u201d\u2014this confronts the mentality of the \u201cnew normal.\u201d Where can asset managers find attractive returns?<\/p>\n Industry experts from around the world, hosted by Darden’s faculty, will probe innovations and investment ideas that could help the decision-maker respond proactively to current conditions.<\/p>\n <\/p>\n Speakers include:<\/p>\n![\"clip_image002\"](\"http:\/\/blogs.darden.virginia.edu\/brunerblog\/files\/2013\/06\/clip_image002_thumb.png\" "\\"clip_image002\\"")
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