I see the world as being a pretty good feedback loop, which has a natural self-correcting nature to it. When economies slack and companies diminish their ambitions, investing less in growth and expansion, their demand for capital shrinks, which naturally translates into lower rates and even reduced lending standards as lenders seek to induce borrowing. The same happens in housing. If borrowers get nervous about the stability of their jobs, or the prospects of getting raises at work they are less likely to look to buy a home. This reduced demand for housing and for debt capital will inevitably lead to lower home prices and lower mortgage rates, and even reduced lending standards in order to induce borrowing. Inevitably, this natural process will succeed in stimulating a natural recovery, as borrowing will commence anew and a new cycle of growth will have been launched. There would be no need for artificial stimulus or intervention. The market will have healed itself.
The same can be said of commodity prices, like oil, which has seen its price collapse of late due to a combination of factors including increased supply with Iran and US frackers’ having come online; as well as diminished demand due to a global economic slowdown led perhaps most prominently by a greatly reduced demand from China. When natural resources such as oil drop in price this is a reflection of the reality of an already slower global economy, and is NOT, as media and market pundits mistakenly believe a leading indicator of future global slowing. In fact, just like low interest rates and lax lending standards, lower commodity prices is itself stimulative and will inevitably lead to increased global economic vitality as more revenues for both companies and families will be able to flow to the bottom line, thus stimulating spending and investing.
This phenomenon of natural healing is not limited to economic cycles but also to social and political. The weakness and helplessness that Americans felt during the Jimmy Carter presidency led naturally to the Ronald Reagan presidency during which America asserted itself much more. Today, fueled by years of frustration in a disconnected political insider class, millions of Americans have found a home in the tents of the Sanders and Trump campaigns. Outrage leads to change, which leads to new and different imbalances, which lead again to more change. Again, these are naturally occurring, and naturally correcting cycles.
I don’t mean to imply that we ought to be complacent and let things play out without our active engagement. Quite the contrary, I advocate for deep involvement by all, which will bring about even more rapid advancement. What I do believe is that we ought not worry too much when oil prices or rates drop precipitously. History has shown that the world is far more resilient than we might believe during these periodic cyclical downturns. As an investor, what this all reinforces for me is the merits of the Buffet principle of investing for the long-term rather than trying to time cycles. Doing this means finding real value and making sure that you have the staying power to ride out temporary downturns.