Doomsday
Prophecy
When a
former White House Budget director who famously never balanced the federal
budget suddenly claims to have special powers to forecast a major economic
crisis, it's hard to understand why anybody pays attention. But recently David Stockman, who served as
Ronald Reagan's budget chief back in the 1980s, has gotten a lot of publicity
for his fiery Easter Sunday article in the New York Times, telling us that
America's future is bleak and everybody should get out of the investment markets
as quickly as possible. His advice (the
first paragraph contains the words "we should be very afraid") is
getting a lot of attention among triumphant doomsayers who have been predicting
America's downfall for decades, and from economists, who wonder where Mr.
Stockman learned how to add and subtract.
The
article was written to support Stockman's newly-released book, called The Great
Deformation, and it shows that the author knows how to generate a lot of
attention. It calls the Federal Reserve
Board "a rogue central bank," and declares that the U.S. is fiscally,
morally and intellectually broke. It
predicts a global currency war that America is destined to lose. Stockton's advice: "hide out in
cash."
Is this
good advice? Interestingly, the article says
that the problems began in 1933, when the American dollar went off the gold
standard, and have simply accelerated ever since. But anybody who avoided the U.S. stock market
since 1933, and hid out in cash, would have missed the greatest period of stock
market returns in world history--not to mention the enormous strides in
standards of living and, most notably, no more economic catastrophes like the
Great Depression. Even the Great
Recession meltdown in 2008 has been followed by a long, steady recovery that
has produced new market highs. And
despite 80 years of disconnect from the gold standard, the dollar remains the
strongest currency in the world, the reserve currency against which all others
are measured.
Predicting
doom is a great business to be in, because our minds are wired to spook at the
first sign of danger, and our eyes are instantly attracted to warning
signs. People buy because they're afraid
not to. The only problem with the
doomsayers who have made these predictions is that they have never actually
been right. Betting on the end of the
world, or the end of the U.S. economy, or the death of the stock market, has
never been a winning choice.
In
addition, you have to wonder how credible Stockman is to be telling us our
economic future. Never balancing the
federal budget puts him in pretty good company, but Stockman also had an
undistinguished Wall Street career at Salomon Brothers and the Blackstone
Group, and his job as CEO of auto supplies manufacturer Collins & Aikman
Corp. led, less than two years after he took the helm, to the company filing
for Chapter 11 bankruptcy protection.
If Warren
Buffett tells us to get out of stocks, we're going to listen carefully to his
arguments. When David Stockman peddles
gloom to an ever-ready market, because he seems to be the only Wall Street
executive who has to supplement his income with book revenues, we simply put
our hands over our ears and continue with our time-tested investment
policies. If his fiery case for gloom
and doom make you nervous, our best advice is to consider what would have
happened if you had retreated to cash in 1933 when the S&P 500 was trading
at 6.25 and stayed out while it rose to (recently) over 1,550. Missing out on 24,700% overall growth (and
all the associated dividends) might be too scary even for David Stockman to
contemplate.
