I was invited to listen to RBC Global Asset Management’s chief economist, Eric Lascelles, present his impressions of the current environment and his outlook. There are a number of reasons that I accepted the invitation, not least of which was the fact that lunch was provided. It’s been a while since I’ve heard the views of a chief economist, and I wanted to feel connected and informed, and I wanted to review whether or not having a macroeconomic view may be helpful to investors.
It was interesting that, near the beginning of the presentation, the economist acknowledged the failure of forecasting. He recalled that, early in the year, the world faced a number of challenges: natural disasters in Japan, the end of quantative easing, and problems in Europe. It was widely believed that the second half of the year would be better. But for all the optimism, the challenge in Europe persists, lawmakers in the US played chicken with the debt ceiling and joblessness has yet to be resolved.
The point that I found valuable was his assessment of the current problem. The economy isn’t suffering from over-regulation or from poor corporate performance. Eric Lascelles pointed out that the problem is a lack of confidence. Companies have cash on their balance sheets, but they don’t have the confidence to put it to work. Consumers likewise are choosing to save rather than spend, based on worries about the future. Politicians are hardly inspiring confidence with their inability to cooperate in the US and in Europe (without minimizing the difficulty of the task before them).
Are we in a recession? Is a recession coming? The speaker suggested that it appeared about 25% likely the US is in a recession and 50% likely a recession is coming next year. But in practice, what’s the difference between a mild recession and a sluggish recovery? It feels the same, whether the growth is slightly above or slightly below zero. The solution to a lack of confidence is to do things that inspire confidence. Policymakers need to show their ability to navigate the current storms. And it will take time.
Eventually, we’ll get back on track. What’s the outlook for the near term? I was interested that the economist’s projection could be summed up as: “We’re likely to stay on the path we’re currently on.” Human beings seem to have a weakness for extrapolation. Rather than predicting a shock or reversal, we tend to believe things will continue on pretty much as they have been. Examples from the presentation include: oil prices will remain between $80 and $100; the Canadian dollar will hover around par with the US$; commodities will strengthen as demand increases.
The RBCGAM presentation was engaging and informative. (The lunch was delicious.) But it reminded me that the forecast of an economist is about as useful as anyone else’s forecast. Even if economists can’t produce solutions to our current situation, they do have some insight into our current reality. For investors, we need to realize that we are facing, and are likely to continue to face, lower P/E multiples. Even if profitability is acceptable, the price investors are willing to pay for stocks has been reduced by the overall lack of confidence. Things will change, but that’s the reality we face now.