by P.J. DiNuzzo April 9, 2013
When a former White House Budget director who famously never balanced the federal budget suddenly claims to have special powers to forecast a major economic crisis, it's hard to understand why anybody pays attention. But recently David Stockman, who served as Ronald Reagan's budget chief back in the 1980s, has gotten a lot of publicity for his fiery Easter Sunday article in the New York Times, telling us that America's future is bleak and everybody should get out of the investment markets as quickly as possible. His advice (the first paragraph contains the words "we should be very afraid") is getting a lot of attention among triumphant doomsayers who have been predicting America's downfall for decades, and from economists, who wonder where Mr. Stockman learned how to add and subtract.
The article was written to support Stockman's newly-released book, called The Great Deformation, and it shows that the author knows how to generate a lot of attention. It calls the Federal Reserve Board "a rogue central bank," and declares that the U.S. is fiscally, morally and intellectually broke. It predicts a global currency war that America is destined to lose. Stockton's advice: "hide out in cash."
Is this good advice? Interestingly, the article says that the problems began in 1933, when the American dollar went off the gold standard, and have simply accelerated ever since. But anybody who avoided the U.S. stock market since 1933, and hid out in cash, would have missed the greatest period of stock market returns in world history--not to mention the enormous strides in standards of living and, most notably, no more economic catastrophes like the Great Depression. Even the Great Recession meltdown in 2008 has been followed by a long, steady recovery that has produced new market highs. And despite 80 years of disconnect from the gold standard, the dollar remains the strongest currency in the world, the reserve currency against which all others are measured.
Predicting doom is a great business to be in, because our minds are wired to spook at the first sign of danger, and our eyes are instantly attracted to warning signs. People buy because they're afraid not to. The only problem with the doomsayers who have made these predictions is that they have never actually been right. Betting on the end of the world, or the end of the U.S. economy, or the death of the stock market, has never been a winning choice.
In addition, you have to wonder how credible Stockman is to be telling us our economic future. Never balancing the federal budget puts him in pretty good company, but Stockton has had an undistinguished Wall Street career at Salomon Brothers and the Blackstone Group, and his job as CEO at auto supplies manufacturer Collins & Aikman Corp. led, less than two years later, to the company filing for Chapter 11 Bankruptcy protection.
If Warren Buffett tells us to get out of stocks, we're going to listen carefully to his arguments. When David Stockman peddles gloom to an ever-ready market, because he seems to be the only Wall Street executive who has to supplement his income by book revenues, we simply put our hands over our ears and continue with our investment policies. If his fiery case for gloom and doom make you nervous, our best advice is to consider what would have happened if you had retreated to cash in 1933 when the S&P 500 was trading at 6.25 and stayed out while it rose to (recently) over 1,550. Missing out on 24,700% overall growth (and all the associated dividends) might be too scary even for David Stockton to contemplate.
P.J. DiNuzzo, CPA, PFS®, MSTx, MBA
President, Founder, and Chief Investment Officer