I’m often asked what keeps me awake at night. Without getting into all of the issues of why middle-aged men don’t sleep through the night, I’ll offer a few thoughts about what could derail the just-ok economic expansion and the grudging recognition markets have given that expansion. Keep in mind that I expect most of the world’s economies to continue to expand and that equity and credit markets are likely to reflect that expansion with favorable returns for investors. That’s central-case expectation, but what could go wrong?
Although I’ve accepted the Fed’s two rounds of quantitative easing as the appropriate response to the financial crisis, I can’t pretend to rest comfortably with a central bank balance sheet that’s mushroomed to $2.7 trillion—three times its size in the late summer of 2008. And while I accept the Fed’s plan to allow its assets to shrink as the economy and financial system normalize, I worry about repeating the 1970s mistake of too much easing for too long and the inflation that may follow, especially since unemployment threatens to remain a troubling and politically potent issue for several years to come. As with long-term use of any powerful and largely untested drug, I also worry that an aggressive monetary policy will have long-lasting side effects on the availability and allocation of capital in the private sector.
As to the employment issue, in an article called “Decline of the Working Man,” published in the April 30, 2011, edition of The Economist, it was reported that just over 80% of American men between 25 and 54 have a job, down from over 90% 50 years ago. We can argue about why and what can be done, but leaving that much human capital unproductive has to make us all poorer and, as noted above, threatens to stimulate ill-advised, short-term supposed fixes.
By the way, I don’t spend a lot of time speculating about either geopolitical shocks or natural disasters. We live in a world with high probabilities of low-probability events, and many investors hold U.S. Treasuries or precious metals as insurance against “black swans.” I don’t disagree with holding some of these investments as “financial insurance policies,” but believe the percentage held—relative to an overall investment portfolio—should be modest and carry high deductibles.
And, in the final analysis, we should never forget about all the things that can go right.