- There are a handful of individuals whose perceptions and market analysis are so skewed that they serve as nearly perfect contrarian signals for investors.
- Here’s why Alex Green thinks one economist’s doubts may indicate a trade deal coming soon.
It’s a truism that no one – no matter how great his intellect, how long his experience, how glorious his honors or how lofty his titles – can consistently and accurately predict interest rates, inflation, economic growth or the performance of the financial markets.
Perversely, however, there are a few select individuals whose perspectives are so blinkered – and whose pronouncements are so ill-advised – that they serve as near-perfect contrarian indicators.
The best of these is economist and New York Times columnist Paul Krugman.
Scoffing (or rather laughing) at his predictions – and acting entirely counter to his advice – has proved to be a winning strategy for investors, not just for years but for decades.
Just a few examples:
- Krugman predicted in 1998 that “The growth of the Internet will slow drastically… By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.”
- He suggested that then-Fed Chairman Alan Greenspan should “create a housing bubble to replace the Nasdaq bubble.” (Greenspan did – and it led to the greatest economic collapse since the Great Depression.)
- He called the U.S. “just a bystander” in global energy only months before hydraulic fracturing and horizontal drilling made us the biggest oil and gas producer in the world.
- When our sovereign debt roughly doubled during the Obama administration, he complained bitterly that the federal government wasn’t spending nearly enough. (He even wrote a book about it – End This Depression Now! – arguing for “a burst of government spending to jump-start the economy.”) Japan tried this recipe and wound up with decades of near-zero growth and the world’s largest debt-to-GDP ratio.
- He predicted a financial collapse if Donald Trump won the presidency, then posted this gem on election night 2016: “It really does now look like Donald J. Trump, and markets are plunging. When might we expect them to recover?… A first-pass answer is never… We are very probably looking at a global recession, with no end in sight.”
A stock market crash with no recovery, “a global recession with no end in sight”?
Instead, the stock market began a 50% move higher the very next day.
And we have the longest economic expansion in U.S. history, near-record-low unemployment, the fastest wage growth in more than a decade, booming capital spending, record corporate earnings, and record U.S. household income and net worth.
Thanks for the heads-up, Paul.
When President Trump signed the tax reform bill into law in 2017 – taking the U.S. corporate tax rate from the highest in the developed world to one of the most competitive – Krugman insisted it would be totally ineffective, a short-term sugar high at best.
Instead the economy is still growing at better than 3%.
That’s not 1% better than the average growth during the Obama administration. It’s 50% better.
As contrarian signals go, the Krugman Indicator is priceless.
On January 3, after citing a handful of widely followed indicators – including the then-faltering stock market – he proclaimed on Twitter that “the Trump boom, such as it was, is over.”
Six months later, the S&P 500 is up more than 20%.
And he’s still at it. In last Friday’s column, Krugman insisted that “Trump is losing his trade wars.”
I have been critical of some aspects of Trump’s approach myself.
Tariffs are hugely disruptive, especially in our globalized economy where companies worldwide have intricate cross-border supply lines.
They are especially counterproductive when implemented to protect domestic industries from foreign competition. That always invites retaliation… and counter-retaliation.
But Trump hasn’t imposed tariffs to protect U.S. businesses from foreign competition.
He has used them as a cudgel to get our trading partners to open their markets to American products and – in the case of China – to play by the rules laid down by the World Trade Organization.
We can argue about whether tariffs are the best tool for this.
But Krugman insists the problem isn’t China. It’s us:
Too many Americans in positions of power seem unable to grasp the reality that we’re not the only country with a distinctive culture, history and identity, proud of our independence and extremely unwilling to make concessions that feel like giving in to foreign bullies… In particular, the idea that China of all nations will agree to a deal that looks like a humiliating capitulation to America is just crazy.
Got that? We’re the bullies.
And a trade deal is unlikely because not violating patents and trademarks, not extorting American technological innovation, and not blocking access to its domestic markets would cause China to lose face.
China sells a lot more to us than we do to them. Our economy is the envy of the world. Theirs is slowing – and the growth they do have is almost certainly overstated in their official numbers.
Yes, we have politics to consider. Next year’s election is the biggest impediment to a deal since the anger and economic pain caused by tariffs – especially in the farm belt – could have repercussions at the polls.
But China has something even more serious to consider since its citizens can’t take out their frustration by voting for someone outside the Communist Party. (See the protestors, street marchers and window smashers in Hong Kong for a minor preview.)
Krugman is almost certainly wrong in his prediction that Trump – and by extension the U.S. – will end up a loser in this trade confrontation with China.
Neither side will get everything it wants, of course. And both sides will immediately spin the final deal as a win.
But any progress will be an improvement over what Trump’s predecessors did to combat China’s unfair trade practices: Nothing.
The standoff is creating pain on both sides, to be sure. But it is hurting China more than us.
Every day the Communist leaders are hearing from disgruntled manufacturers, distributors and exporters, and from foreign companies and investors who are voting with their feet, moving operations to Vietnam, India and Taiwan, or simply forgoing investment in China as too risky or uncertain.
That’s why you should expect a trade deal, not just before the election but before the end of this year – and perhaps in a matter of weeks.
When that happens, the markets will roar.
Krugman, of course, will continue to squeak from his perch at The New York Times.
And we’ll keep capitalizing on his dim-witted pronouncements.