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Investors should be wary of false confidence: We may be heading into the longest recession of our lives

JOHN DE GOEY OPINION

Most people I know consider themselves to be optimists. That’s how I think of myself, too. Not surprisingly, the people who call themselves that are also happy with and perhaps even proud of their positive self-assessment. Whether or not they know it, studies show optimism to be a wonderful thing in terms of happiness, health, and overall quality of life.

Problems seldom arise because of the resiliency that is the hallmark of an optimistic outlook. A rare example of optimism being dangerous is when general bonhomie gives way to irrational confidence. This is called “optimism bias” and it can be dangerous.

It is a cognitive bias that causes people to think they are less likely to experience a negative event, or, if they do experience it, that it will be less severe than what others experience. Optimism bias is one of many behavioural quirks we are all prone to and it transcends gender, ethnicity, nationality and age. Indeed, anyone could succumb to its charms. Part of the problem is that people who happily allow themselves to be called optimists are less happy to be called biased.

If looking on the bright side is your natural predisposition, you probably think that such a default attitude toward life serves you well. You are right to think that, too. The thing is, since the end of the Second World War pretty much everyone in Western society canmake such a claim– at least, in comparison with their parents and grandparents. Now that we’re into the second half of 2022, we might want to step back and re-assess our worldview based on what has gone on in the past eight months or so.

Since the year started, we’ve seen some of the highest debt levels in history, both in terms of various levels of government and individual households. We’ve seen war break out in central Europe in a way that few could have imagined. We’ve seen climate disasters magnify, even while our collective ability to meet our Paris obligations seems to be increasingly remote. We’ve seen inflation hit multi generation al highs. Currently, it looks as though every single one of those challenges could potentially get worse. Be optimistic all you like, but this trend seems to be persisting and maybe even accelerating.

This doesn’t mean we can’t get through tough times. Of course we can. The problem, as some see it, is in setting rational expectations. Since we got through previous challenges without much fuss, I sense this feeling of false confidence and it frightens me. Right now, the future looks less bright than ever before in my lifetime, yet the “don’t worry, we’ll be fine” mantra seems to carry the day among most people I speak with.

They seem to have their personal happiness calibrated in a way that causes them to underestimate how easily and how severely things could go off the rails. There are myriad threats out there, some that are genuinely existential. Despite this, most people I meet exhibit a disinterested acceptance of things, or sometimes anger combined with denial and inaction. Precious few have an appetite to acknowledge problems, much less solve them.

Until recently, the dominant narrative was that a “softish” landing was possible for capital markets. When it became obvious that such an outcome wasn’t possible, thenarrativeswitched. Now, thestoryisthatarecessionisinevitable, but it will be both short and mild. This is where we stand today. I might be an optimist, but I don’t buy it. The glass is simply not always half full.

EconomistNourielRoubinihas warned of a strong chance of severe stagflation hitting the world economy, lasting for a couple of years. Rather than heed his warnings, some pundits have taken to name-calling (he is known as Dr. Doom to some) without addressinghisabiding concerns. ButifMr. Roubini is right, we may be heading into the deepest, longest recession of our lives. If that happens, there’s no telling how we will collectively react because we have never experienced anything like a recession of such magnitude before. I hope it doesn’t come to that, because if it does, I’m worried that the optimism of the times may be no match for the harsh reality of what is to come.

NEWS

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2022-09-29T07:00:00.0000000Z

2022-09-29T07:00:00.0000000Z

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