Wednesday, July 14, 2010
The New Doom: A Second Wave of Economic Pessimism Spreading Outside Wonkdom
By Max Abelson
July 13, 2010
"Life is such a fucking disaster," a prominent New York hedge fund manager said recently. "We all live in some kind of world we create for ourselves. And I think that what happened is that built into that world were very enlarged expectations about what life was going to be. There's been this sensation of excessive expectation that, frankly, became unsustainable."
He had just returned from his ranch in the wilderness of central Idaho. "I just like it because it's massively low human density. It would be a place you could hole up in. But, gosh, I hope that doesn't happen."
Last week, not very far from the hedge fund manager's ranch, the billionaire John Malone gave a little-noticed interview to The Wall Street Journal from Allen & Co.'s annual Sun Valley conference. Asked about the biggest risks to Liberty, his media conglomerate, Mr. Malone said his concern was this country's survival. "We have a retreat that's right on the Quebec border. We own 18 miles on the border, so we can cross. Anytime we want to, we can get away."
His wife is more concerned: She's already moved her personal cash to Australia and Canada. "She wants to have a place to go," said Mr. Malone, No. 400 on this year's Forbes list of the richest people in the world, "if things blow up here."
Before the financial crisis, furious pessimism about the national economy started with a small and mostly scholarly group of doomsayers, like N.Y.U.'s Nouriel Roubini and Yale's Robert Shiller. But that pessimism has now gone mainstream, spreading from wonks in finance to the city's daily conversation as last year's rebound drifts further away. Growth is slow; unemployment is enormous; the world feels sludgy. It won't help if banks post withered profits later this week, as they're expected to.
Part of what makes this second wave of gloom different is the sense that the rot isn't going anywhere. You read through The Times and worry that the country will sink into a third depression-Paul Krugman said a few weeks ago that it already has-unless the U.S. government does something serious. But then you think about where money for another stimulus would come from, and what will happen if trillion-dollar deficits get worse.
"I think that a lot of people are becoming realistic over the outlook, because let's face facts," said David Rosenberg, the chief economist and strategist at the investment firm Gluskin Sheff. "It's going to leave some pretty deep emotional scars, don't you think?"
Still, optimism lives. After this month's Times profile of Robert Prechter, the forecaster who says we've begun the worst market decline in something like 300 years, Mr. Krugman's colleague Ross Douthat used his Independence Day column to complain about worrywarts. If Jimmy Carter was wrong about shortages, grim sacrifice and an energy emergency, he said, the new pessimists are, too.
HUMANS HAVE THIS poignant desire to feel that we're in control," the hedge fund manager said. "I know there will be abrupt change."
"We have Ben Bernanke, who has figured it all out; but you and I know he's just guessing," said Mr. Shiller, the Yale professor. The first edition of his book Irrational Exuberance warned in 2000 about a stock market bubble, and the second edition in 2005 predicted the real estate collapse. "When you see something like the BP oil spill, you know we're just plunging headlong into the future without knowing what we're doing."
"If you've got job security and wealth preservation under lethal pressure, then you're going to take the negativism into a place that it hasn't been before," Stephen Roach, Morgan Stanley's non-executive Asia chairman and the firm's former chief economist, said. "TARP, zero interest rates, trillion-dollar budget deficits, you name it, we've thrown anything we can at the system. And that has been successful to a limited extent at stopping the bleeding, but it has not really allowed the patient to get up off the table and resume a normal life again."
One problem is that there isn't a consensus about what our catastrophes are, or how they can be fixed. Mr. Roach and Mr. Krugman, for example, have feuded this year over China. (One said a baseball bat should be taken to the other.) This week, Lloyd's of London and the monolithic English think tank Chatham House warned about peak oil, the semi-apocalyptic moment when the world's oil production will max out and then decline. Not preparing for the new energy realty, they say, will have "potentially catastrophic consequences."
On Friday, just before that report was published, the blog Zero Hedge, a kind of global hub for catastrophists, posted a "wall of worry." The American government, said the first of 50 factoids about the economy, is projected to issue about the same debt this year as the other governments of the world combined.
"Few appreciated that the shift would be as deeply structural as it was demonstrated to be," the site's editor, who writes pseudonymously as Tyler Durden, said in an email. "With trillions of dollars spent to prevent an all-out economic collapse we have only managed to buy under two years of time and the economy is once again starting to roll over."
The hedge fund manager said he doesn't even trust gold. "It's worthless if the social fabric tears," he said. "We're going to have to do something different, before we get down to where it's really bad."