Tuesday, March 03, 2015

The Long and Short Views

by Bill McBride on 3/03/2015 12:29:00 PM

CR Note: The following is a post I wrote in January 2007 that is hopefully worth repeating.  I warned about always being short term bearish, even though most of my posts were very bearish back then!  I was predicting a recession would start in 2007 (the Great Recession started in December 2007), however I was still optimistic about the future.

In the comments, and occasionally via email, people have expressed surprise at my positive long term outlook. This reaction is probably understandable since most of my posts have a bearish economic tone.

In my view, both history and logic suggest that the economic future will be brighter. Economic growth has been the norm, and in the long term, the markets almost always reward the bullish investor.

It's human nature to be concerned about specific events, but historically the economy has recovered quickly from trauma. Concerned about the bird flu? Look at the 1918 flu pandemic that was followed by the Roaring '20s. Concerned about an economic Depression? The Great Depression was the worst economic event in recent times, and the economy was fine after WWII.

These are serious, but relatively short term events for the general economy.

Logically this makes sense. Economic growth is dependent on innovation and population growth. And innovation will almost certainly continue. In fact, the only real threats to the long term economy are massively destructive events (like a major meteor strike) and impediments to innovation.

It's not worth worrying about very low probability events like super volcanoes or meteor strikes. However higher probability events, like the potential impact from global warming, is probably a concern. But once again, even with global warming, innovation will most likely (hopefully) save the day.

I'll discuss possible impediments to innovation in a future post.

So why are my posts generally bearish? Simple - because I am writing about the short term. And in the short term I'm concerned about the impact of the housing bust on the general economy. And a short term aberration (a recession) to the long term trend is interesting and worth discussing. Clearly I'm bearish in the short term, and I feel the "odds of a recession" in 2007 "are at least a coin flip".

But we have to guard against always being short term bearish and long term bullish. That doesn't work from an investment perspective, since we will always be cautious in each successive short term - and the sum of many short terms is the long term. Intelligent people can always make a strong short term bearish argument, so a pattern of always being short term bearish is a serious risk - just something to consider.

Luckily, as I've been noting for some time, we will probably know by mid-2007 if the housing bust is going to significantly impact the general economy. I believe it will, so the next few months should be interesting.

Best to all.