Animal Spirits, the Trade War, and Tools of Combat Against Recession

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Adrian Cronje
August 29, 2019
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In order to help our clients understand current events, risks, and opportunities, Balentine embraces perspectives from across the economic landscape. This often includes dialogue with authors and luminaries at industry events. Recently, Balentine CEO Adrian Cronje, Ph.D., CFA, spoke with Emory University’s Jeff Rosensweig, Ph.D., director of The Robson Program for Business, Public Policy, and Government, and an associate professor of finance at the Goizueta Business School. This lively conversation, which took place at the annual conference of the Southern Capital Forum, covered topics ranging from tariffs to cryptocurrency to the labor market, and more. Following are a few highlights from the discussion.

Self-fulfilling prophecy is a real and powerful force in the world of finance.

Our mental wiring and animal nature make us impressionable to conditioning and susceptible to foregone conclusions. This includes the idea of a recession. In their book Animal Spirits, authors George Akerlof and Robert Shiller refer to this reality of human behavior as our “animal spirit”—the combined emotional and gut-level forces that can be so hard to explain yet often influence decision making in economics and virtually all areas of life.

Given this phenomenon and the 24/7 news cycle, it’s become astonishingly easy to propagate virtually any idea regardless of its merit. It’s important to examine with some healthy skepticism how things like constant talk of inverted yield curves and multiple European nations flirting with recession could end up fueling a downturn in the U.S. We are not there yet, and with the right mindset and tools it may well be possible to disrupt consensus and slow down collective momentum around a recession.

“Businesspeople have animal spirits. Consumers do. It's basically in our gut, how do we feel things are going. And if we have a prophecy that we're moving into a recession, businesses are not going to expand. They're not going to make major investments. Consumers might retrench. They're not going to buy a new home or car. And we can bring it on ourselves.” —Jeff Rosensweig

Corporate tax cuts did not pay off, while the U.S.-China trade war continues to benefit other Asian countries.

Politics aside, the recent corporate tax cuts were intended to fuel investments in fixed assets vs. inventory by U.S businesses. But it simply didn’t work out that way—as Dr. Rosensweig pointed out, “There was one small bump for roughly a quarter.” On the heels of the tax cuts, the uncertainty introduced by the Chinese tariffs and verbal trade war has held businesses on the sidelines, fearing a recession like many consumers. Meanwhile, due to the natural substitution effect as companies like The Home Depot look to offset the rising cost of Chinese goods, countries like Vietnam, Thailand, and Indonesia are starting to benefit.

“This trade war that's often presented as a zero-sum game between the United States and China might have other medium-term implications for other countries.” —Adrian Cronje

Cryptocurrency: Intermediaries will benefit, but few of these currencies have staying power.

Angst about low to even negative interest rates and questions about authorities’ ability to stave off recession continue to generate interest in alternative currencies, despite regulatory headwinds and their inherent lack of stored value. Rosensweig noted that, despite the attention cryptocurrencies receive, it doesn’t mean they’re a good stalwart value for the average investor. He added that while processing conduits, intermediaries and some fintech companies will make money, he believes most cryptocurrencies will disappear until only one or two remain.

“Whenever something seems like it's here to stay…Bitcoin going up or dot-coms, that usually means at some point they're not going to be here to stay.” —Jeff Rosensweig

We have the time and tools to combat a recession.

“…if politicians do what politicians do well, like defer tariffs until Christmas, the economy might run a little harder than people anticipate.” —Adrian Cronje

Balentine’s Adrian Cronje reminded attendees of expectations heading into the end of 2019 and the incentive for the administration to avoid a recession in the lead up to the 2020 election cycle. “The bond market is expecting two more interest rate cuts, for example, before the end of the year. There’s talk by President Trump of potential fiscal stimulus,” he explained. Rosensweig agreed authorities could still use several means at their disposal to stimulate the economy in the event of further slowdown. These could include quantitative easing to improve liquidity, additional tax cuts, etc.

Rosensweig also urged investors and experts alike to keep numbers in perspective, explaining that in 2008-2009 (during the Great Recession) the economy was smaller, tax revenue withered, and unemployment reached 10% in a $14 trillion economy, creating a deficit of 10% of gross domestic product (GDP). Now, the economy is about $21 trillion, placing even a trillion-dollar deficit at only about 4.5% of GDP. But if business executives and consumers fear a recession, they may cut spending on U.S. products. This will bring on the recession—thus their prophecy becomes self-fulfilling.

“…the economy is a lot bigger than it was at the time of the Great Recession. I’m not in favor of deficit spending in the long run, or accumulating debt, but in fact there is room to cut taxes if need be. So, there could be more room than people think to take actions to get us out of a recession.” —Jeff Rosensweig

Additional resources, including referenced books and experts, from the discussion.

Special thanks to Jeff Rosensweig for taking part in this conversation. Please email us to receive a copy of the full transcript.

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