Premortem: How the Global Doomsayers Got It Wrong in 2015

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Dec 22, 2014 11:30:00 AM

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VolatilityUncertainty_5As I’ve written before, the doomsayers have been pretty comprehensively wrong, at least in terms of their dire predictions for the U.S. While they may yet be right elsewhere in the world, I thought we’d do a premortem on their behalf to figure out how they might get it wrong for the global economy, too.

What if everything turns out just fine?

Like last week’s post, this is a thought experiment, and also a reminder that premortems can be applied to negative forecasts as well as positive ones. With any set of deeply held convictions, one of the most beneficial things you can do is to think very carefully about how you might be wrong—and a premortem is a great tool for doing that.

Best-case scenario: looking back at a great 2015

As I write this, I think back to the concerns we had about the world economy at the end of 2014 and wonder how we could have been so wrong. Worries about Russia, about China, about Europe, and even about low oil prices haunted us for months, only to vanish as the global economy rallied. Looking back it seems inevitable, but in fact, we were lucky.

The engine of that recovery was low oil prices, which propelled the U.S. economy back into overdrive. With employment and wages accelerating, consumer spending took off. The strong dollar made imports much cheaper than they had been, especially for cars and electronics, to the immediate and substantial benefit of the exporting nations.

China and Japan were at the head of that list, followed by Germany. France and Italy also took advantage of their newly lowered costs to drive exports and tourism, which brought a new wave of economic recovery and investment there. Substantial improvements in the economies of Spain and Ireland finally took hold, with U.S. companies investing in the newly cheap areas of the eurozone. Slowly growing confidence finally sparked consumer spending growth in Europe, starting a self-sustaining recovery and making the European Central Bank’s planned interventions unnecessary.

China’s growing exports also led to a consumer spending boom there, bringing its economy much closer to balance. Government efforts to increase pay and build a social safety net made consumers feel less compelled to save. That ability to spend, combined with a growing consumer manufacturing sector, made consumer spending a much larger share of the economy. Even Japan, driven by central bank action, finally broke the deflationary mentality and got its citizens to start spending again, bringing growth to multiyear highs.

As we close out 2015, our biggest economic worry is that the global economy is overheating—the exact opposite of where we were a year ago.

And now, back to 2014

Typically, U.S. growth has been the engine that powers a global recovery, by way of imports from other countries. With U.S. growth accelerating, it’s possible that a global recovery may take hold in 2015. Though I very much doubt next year will be as successful as described above, it’s not outside the realm of possibility.

Remember, the premortem is just as useful for testing negative projections as it is for positive ones— something that we post-2008 depression babies should all keep in mind.

                                     

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