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Talk, Beliefs, and Feelings - October 8, 2019

“What We Need is a Positive Attitude”

Haruhiko Kuroda made economic history in 2015 when he compared monetary policy to a children’s story. Trusting that his audience was “familiar with the story of Peter Pan”, he warned, “The moment you doubt whether you can fly, you cease forever to be able to do it”. While Kuroda may have run out of pixy dust, as we described here, an increasing amount of market commentary is placing significant weight on talk, beliefs, sentiment and feelings, rather than raw data.

One example is the commentary from the NFIB’s SBOI survey. The latest Small Business Optimism Index dropped compared to August, but September’s reading of 101.8 is still “within the top 20% of all readings in the Index’s 46-year history”. None of the Index components advanced, as “three were unchanged (at good levels), and six declined”, the “survey shows no sign of a recession”. But sentiment and uncertainty could snatch defeat from the jaws of victory. With the Uncertainty Index having “risen 6 points over the past three months”, owners are increasingly becoming “unsure”. William Dunkelberg, NFIB Chief Economist, argues that though “there is still substantial economic optimism”, “perhaps the country will indeed talk itself into a recession”. “Mumblings about a coming recession (or at least weaker growth) are becoming more prevalent, and this is contagious”.

Echoing Dunkelberg’s comments, is none other than Nobel prize-winning economist Robert Shiller. In an interview with Barry Ritholtz on Bloomberg Radio, Shiller discusses his latest book, and how stories and narratives have “a very big impact on markets and the economy”. When Ritholtz asks “can we talk ourselves into a recession?”, Shiller responds with “absolutely… that’s what I think is at risk right now”. Shiller points out that “somehow we are really talking about recession and we’re not in a recession… It may well trigger a recession.”

Finally, we were struck by a recent report from the BIS on unconventional monetary policy tools. Coverage of the report, like this article from the Financial Times, has focused on the “negative side-effects” and still yet-unknown “consequences”, but the report had further conclusions. First, it argued that monetary policy “would be more effective if other policy agencies are prepared to deal in a timely way with financial vulnerabilities” (looking at you, fiscal policy). Second, the authors warn that the effectiveness of unconventional tools “depends critically on the specific circumstances of their use, including the public’s belief about their effectiveness”. The report argues, “expectation management is a key consideration in the design, as well as in the actual implementation of monetary policy at all times, and even more in times of crisis”.

With apologies to Shakespeare, it appears that there is nothing either good or bad for the economy but thinking makes it so.