The persistent worry about economic decline

One careful reader of our April letter on uncertainty (The Tariff Panic) asked why I argued that the US economy, and in fact, the world economy, is much less fragile than is widely thought. It’s understandable to view the economy as “hanging on by a thread” because this is the way it is commonly portrayed in the news. The headline below shows that economic strength is reported as a surprise.

There are a couple of images that I keep in mind whenever an economic crisis hits or is anticipated. These apply to both the US and world economies:

• The economy is not a house of cards, it is a beehive. Total collapse is nearly impossible; instead, part of the economy can collapse and like a beehive that part can be cut off, while the rest remains alive to rebuild. 
• The economy is like a river 2 feet deep and 50 miles wide. Occasionally, governments attempt to build a dam in an effort to “guide” the economy in a direction they believe is an improvement using taxes, tariffs, or regulation. But the dam never reaches all the way across and investors and businesses focus their efforts on the part of the river that keeps flowing.

The tariff crisis envisioned by many before April 2nd was just such a dam or destruction of part of the beehive. But what accounts for our robust image of the economy compared with the fragile view?

Individual business owners and operators, as well as investors, are routinely underestimated by the mainstream media. This is the same media that spends nearly all their time covering politics and government policy instead of talking to individual economic actors. 

That very large and important group (business people and investors) is constantly on the lookout for opportunity, and every change in the “rules of the game” offers new opportunities while closing off others.

This model is now world-wide, not just confined to the United States, traditionally the freest economy in the world. There are massive pockets of wealth all over the world now. Singapore, Saudi Arabia, and South Korea come to mind as places that were impoverished two generations ago and now are in a position to invest and build businesses in the part of the river that continues to flow.

The world-wide aspect is crucial. When national economies were mostly walled off from each other, pockets of international wealth found it difficult to invest where opportunity remained available. In today’s world, money can flow to its highest and best use with less political interference than in the past. 

Our advice to long-term investors is simple: Focus on businesses, not the media. 

Best regards,

Daniel A. Ogden