Volatile Year Coming

We have reached Labor Day weekend which, in the US, is a holiday for honoring work and workers. If you’re a Baby Boomer like me, you also grew up knowing school was about to start again. We didn’t do the mid-August thing back then. The first day of school was the day after Labor Day. That meant entering a new grade with unknown challenges.

As adults we do the same in our work—and managing your investments counts as “work.” So today I want to talk about the coming year’s class schedule. We face some tough subjects, and if we get through them, it may mean we get to go on to yet another year with even tougher ones.

I think the last few weeks marked a turning point in the economic narrative. It’s more than the trade war. A sense of vulnerability is replacing the previous confidence—and with good reason. We are vulnerable, and we’ll be lucky to get through the 2020s without major damage.

But that’s getting ahead of ourselves. Let’s talk about the risks facing us in the next year or so and the economic environment in which we will face those risks. I think that environment is one of potential supply shocks, subpar growth, and increasing volatility… among other things.

Supply Shocks Ahead

For some reason, NYU professor and economist Nouriel Roubini is often called “Dr. Doom.” He and I have been friends over the years, and I got to know him pretty well when Shane and I randomly rented an Airbnb in the same NYC building where he had a penthouse apartment. He was gracious with his time and we had more than a few late-night talks in which I felt no sense of doom. But he is indeed currently bearish on the economy.

Nouriel explained his outlook in a recent Project Syndicate piece, The Anatomy of the Coming Recession. To summarize, at a time when the world economy is already slowing for cyclical reasons, we also face three potential shocks, any one of which could trigger a recession.

  • The US-China trade and currency war
  • A slower-brewing US-China technology cold war (which could have much larger long-term implications)
  • Tension with Iran that could threaten Middle East oil exports

The first of those seems to be getting worse. The second is getting no better. I consider the third one unlikely, because neither the US nor Iran would benefit from military conflict. But someone could miscalculate.