July 1, 2019 was a pretty weird day.
Residents of Guadalajara, Mexico woke up to a massive, freak hailstorm—temperatures are usually in the low 80s that time of year—that covered parts of the city in five feet of ice.
But that wasn’t the freakiest thing that happened, at least not to a geek like me. It turns out on that day last summer, the economic expansion became the longest on record. And of course the economy continues to extend that new benchmark, day by day, week by week, month by month.
This upcycle, which according to the the National Bureau of Economic Research began in June 2009, is now 127 months old and counting, a good bit longer than the old record of 120 months (from March 1991 to March 2001).
In other words we’re living on borrowed time. To me it sort of feels like tip-toeing through a pack of sleeping dogs. At some point you’re going to trip on one, and then the whole game’s up.
Legendary investor Sir John Templeton famously said, “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.” Where are we now? Well, to give you an idea, the word on everyone’s lips at the World Economic Forum in Davos, (where I was all week) was ‘optimism.’ It was more or less the theme of President Trump’s speech. Facebook COO Sheryl Sandberg declared herself to be an optimist at FB’s cocktail party (despite her company’s travails presumably.) And almost every single CEO and/or executive we interviewed (some 70 of them) spoke about how optimistic they are.
You got it. Uh-oh.
To be fair, leading lights of private equity, Blackstone CEO Steve Schwarzman and Bain Capital Co-chair Steve Pagliuca acknowledged to me that prices of companies are high (more or less commensurate with stock prices) making it tough for them to buy. For the most part though, the scene appeared to be viewed through rose-colored glasses.
So what’s an investor, homebuyer or seller, CEO or wage earner to do? Should you try to change up your plans based on where we are in the cycle?
Probably not such a great idea, at least according to three people who know such things and were on a panel I moderated—titled: A Strategy for the Next Growth Cycle.
Why? You start with a huge problem right off the bat, “Exactly timing the cycle is not possible,” says Mark Machin, CEO of the Canadian Pension Plan Investment Board (CPPIB), one of the world’s largest sovereign wealth funds with over $409 billion under management. “What’s GDP like in six months? I’m not sure we can time that perfectly.”
Even though Machin agrees with the private equity bosses—that we appear to be late in the cycle—it doesn’t change his thinking much. As a mega-investor, Machin says he looks for companies and investments positioned for years or even decades, not just quarters. These companies have capital in place and are set to ride long-term trends like renewable energy, an area in which he recently invested.
Us peewee investors should think along the same lines.
‘Expansions don’t die of old age, the Fed kills them’
Renee Mauborgne, professor of business strategy at international graduate business school INSEAD and author of the bestselling book, “Blue Ocean Strategy,” is all about helping companies and leaders figure out how to buck the cycle. “The key is breaking out of your existing paradigm and offering true value to buyers,” she says. Naturally, she points to Amazon, Apple and Netflix as companies that have succeeded here, but points to others outside the corporate world that have figured out how to control their own destiny rather than remain prisoners of the cycle.
“The country of Dubai turned an area of sand into a whole new world,” Mauborgne says. She also made mention of Cirque du Soleil. Think about that one for a minute. A few guys up in Quebec in the early 1980s decide to create a contemporary circus. They end up being huge in Vegas, and of course all over the world. Who woulda thunk?
Truth be told though, none of us have the luxury to completely ignore cycles. And it would be foolish to do so. Rich Lesser, CEO of the Boston Consulting Group (BCG), said companies on their game, make plans to execute strategies which make good sense during downturns. Lesser sited Pfizer buying Wyeth in January 2009, in the teeth of the Great Recession, as one such, “brave decision.” Says Lesser: “If the deal is expensive, it doesn’t make sense, but when times were tough it did.” The point is, Lesser says, Pfizer had positioned itself to think for the long term and to understand it needed to play differently in a different environment. “When those things happen, you move.”
The lessons for us ordinary folks? If you can be patient about buying a vacation condo, for example, maybe you want to wait for a downturn. Just know you may be sitting on your hands for longer than you think, and you may be feeling the pinch yourself at that point.
What will in fact end this expansion—to the extent we care? Of course no one knows, but I can give you some context.
For starters think about what Wall Street saw: “Expansions don’t die of old age, the Fed kills them,” meaning the Federal Reserve raises rates to stave inflation only to end up creating a recession in the process. We probably aren’t going to see that over the short term, according to Scott Minerd, Guggenheim Partners’ global CIO, who told me that he thought the Fed was actually in the process of doing this in 2018, (before Trump began his jawboning), but then Fed Chair Jay Powell reversed course. Now the Fed may be reluctant to go down that path again.
But that doesn’t mean we’re scot-free. Minerd says easy Fed policy this late in the cycle could lead to too much liquidity, which might create bubbles and lead to a recession, that way, which Minerd says is what happened in 1990 and 2001.
I put this to Machin—as big a market participant as you’re going to find, i.e., how long does he see the expansion lasting, and he said he thinks this slow growth environment (n.b., ‘growth’) would continue for the foreseeable future.
OK. Makes sense. So we’re all good—until the next black swan swims along. Or the next hailstorm hits Guadalajara.
This article was featured in a Saturday edition of the Morning Brief on December 21, 2019. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Andy Serwer is editor-in-chief of Yahoo Finance. Follow him on Twitter: @serwer.