Tuesday, January 22, 2008

Recession: Acceleration at the Top

On the subject of recession, envision two models of shifting views. In the first model, belief that a recession may occur grows linearly. Last week, 40% of economists (or whoever) believed that we would have a recession. This week, it's 50%. Next week, it will be 60%. That, I think, is an unlikely model. The alternative, I suggest, is a logarithmic or accelerating model. The acceleration occurs because recession means fear and pain. One might expect a similar acceleration in predictions about any undesirable but increasingly probable development. In this acceleration model, people initially resist believing in the negative outcome. The positive was good for them, and they want it to continue. So instead of ratcheting up by 10% per week, as perhaps it should, the opinions of economists (or whoever) initially increase by only 5%. Last week, 40% of economists publicly admitted that we were approaching a recession; this week, 45% of economists did so (even though the facts were such as to support that finding by a full 50%). It is like a rollercoaster. You do not just go directly into a 45-degree drop. First, once everyone is on the train, you roll out of the station. You screw around for a while -- up, down, up, down. Nothing major. Finally, you come to the big drop-off. But it does not happen all at once. There is a gradually steepening curve. You know what comes next. It is really scary, and there is no way on Earth to stop it. But you are not yet prepared to embrace it; and for a few seconds, the rollercoaster does not actually force you to embrace it. You are going down -- soon, but not for another fraction of a second. There is still time to hope, and to fear. That's Part I. Next, you do go over the cliff. You are indeed plunging downwards at a 45-degree angle. But it feels like 75 degrees. You're moving like a bat out of hell. You feel like you are going straight down. So now the economists are fully focused. We are into a recession: it will be a bad one, we don't know when it will end, etc. Now, instead of an increase from 50% of economists this week to a tally of 60% next week, the pace picks up. Now everybody is a believer. You go from 50% in one week to 75% in the next week. This is what panics are all about. People sell when they actually might not need to sell. The bottom might come soon. Or it might not; we really have no idea. The point here is simply that opinions change at an accelerating pace, not a linear one.