We here at CrunchedCredit are getting ready, as we do each year at this time, to polish up the palantir and make our predictions and business projections about the coming year. While it can be a fun exercise, it’s actually serious business. To start with, you need a macro view of the geopolitical situation, the markets and the economy. To not start with a macro view is to make a choice, and a bad choice at that.
Oh, we’re usually largely wrong about many things; that prognostication thing, especially about the future, is a fraught and persistently frustrating business, but we get some stuff right and it is a useful exercise that informs the arc of our business strategy in the coming year.
So what’s the world looking like right now? That question got me thinking about Schrodinger’s Cat. Now what I know about quantum mechanics could be incised on the head of a pin with a jackhammer, but I do remember the thought experiment in which the good professor tried to explain quantum mechanics to the unwashed. He postulated that a cat, a flask of poison, and a radioactive source are placed in a sealed steel box. If a radiation monitor detects radioactivity, the flask is shattered, and the cat goes to the great litter box in the sky. Is the cat dead or alive? You can’t tell until you look. In quantum mechanics that’s called a superstate — the cat is both dead and alive until it is observed.
Apparently, this makes some sense because much of the modern world is based on the insights of quantum mechanics and if it didn’t work, we’d be back to living in caves. So let’s take Schrodinger’s Cat as a useful insight for building our business case.
Is the US debt balance an unsustainable threat, or actually pretty okay? Is Ebola a global pandemic threat, or just a horrible curse on the poor folks of West Africa? Is the revanchist and newly aggressive Russia a threat to Europe, or not? Is the European banking crisis over, or is it actually worse? Is ISIS a real threat to the US? To the global community? Is China a real threat to peace in Asia and the US or not? Will QE’s’ end trigger a recession, or is it baked in? Will inflation reignite? Should it? Is the new normal a zero bound rate structure? Will Dodd-Frank and Basel III materially impair capital formation or are they distillations of legislative wisdom that will save us from future financial crises? Is income inequality just the price of our knowledge base, post-industrial world or is it a shattering of the social contract, which, if not reversed, will lead to destructive social conflict and instability?
Off and on during the past several months, each of these issues and more have been the center of short but intense periods of fascination across the US. The talking heads talked and wrung hands. The 24 hour news cycle fed. You could hardly listen to the radio, watch television, read a newspaper or surf the net without seeing headlines screaming about these existential macroeconomic or geopolitical risks.
And now: Not. Nada. Crickets. Heard much about the South China Sea recently? Didn’t think so.
Did the things we were worried about go away? Or did we just stop looking? Are macroeconomics and geopolitical risks in a superstate?
If superstate theory is a tad too new age-ish for you, think of a lion stalking a gazelle deep in the Serengeti. The lion, having inspected the Serengeti menu has chosen its entry (on the hoof), moves forward in little spurts of speed, freezes and squats down in the tall grass. The gazelle, which is little more than a tummy and a bundle of flight instincts, senses something, stares around intently for a few moments, sees no movement, shrugs (I guess they can shrug) and goes back to cropping grass. Reboot and repeat as the lion inexorably gets closer, until the ADD-addled gazelle is lunch.
Is a problem real only when we focus on it, and what happens when we don’t?
The answers to these questions really matter. When we focus on a problem, we act and plan. On the largest macroeconomic and geopolitical stage, sometimes our policy elites and governmental types even manage to shift their rumps and do something constructive. We chide China, we escalate our embargos on Russia, recalibrate fed policy or adjust economic policy to address tired Europe. Business retrenches or doubles down on growth — plan for success or prepare for hard times. But it seems when these issues again become unobserved, risk mitigation behavior ceases. Are we the gazelle? And how did that work out for you, Mr. Gazelle?
What I’m trying to get at here is, the world may be as fraught as it has seemed many times over the past year and we are just tired of thinking about it? And it could be worse.
Imagine, instead of focusing on these concerns seriatim, we saw them all at once in a moment of searing clarity. Our hair would be on fire, wouldn’t it? The public would cry for the government to act and businesses would prepare for real trouble here at home and around the world. Here at Dechert, we would change position and posture.
Back in October we wrote a blog focusing on some of these risks and wondered whether the world was broadly a safe and amiable place with just some noise and static around strutting dictators, incompetent politicians and faulty economics or whether it was time for guns, canned food, a “go bag” and an Idaho vacation farm.
Which one of those two world views characterize reality is awfully important as we think about planning for our business’ future. In many respects 2015 looks to be a fairly halcyon year. Falling oil prices, increasing consumer confidence, continued low interest rates, a soaring stock market, perhaps a 3+% GDP economy, and at least the possibility of less regulatory interference from the government apparatchik now to be called and held responsible by a republican Senate and House. On the other hand, if all of the other concerns which so riveted the public and the policy elites periodically over the past year really haven’t gone away and we have just lost our interest and focus, then this is a much more dangerous world.
So do I expect our business to grow or is it time to hunker down? I frankly don’t know. I certainly could make both arguments that things are good, or things are bad. I suspect that as we build our business plan for 2015 using that old reliable Occam’s razor, I will assume the former is the case and the year will be relatively benign as it sort of seems that way right now. We will plow ahead assuming the economy will grow and our business will thrive. On the other hand, it’s just worth a moment once in a while to wonder whether that cat is dead.