When Uncertainty and Unknowing Collide

If you can believe it, Donald Rumsfeld has stated:  “As we know, there are known knowns. There are things we know we know.  We also know there are known unknowns. That is to say we know there are some things we do not know.  But there are also unknown unknowns, the ones we don’t know we don’t know.”  One thing is for sure:  I know enough to know that I don’t know what he’s talking about.  Or, shall I more accurately say that I’m uncertain.

Coincidently, it is interesting to note is that the word “uncertainty” has appeared 26 times in the most recent Beige Book.   While this is less than the 33 “uncertains” in the early September edition, it is still pretty bad.

You may have heard economists and financial journalists refer to the “The Beige Book.”  I don’t know if it’s really beige (it should be fire-engine red); but it is a qualitative assessment of business, banking and economic conditions by bankers, and small and large businesses in each of the 12 regional Federal Reserve districts.  

Not all of the uncertainty was attributed to our ongoing economic woes or the current financial turmoil in Europe. There were 19 mentions of the upcoming holiday shopping season in the most recent Beige Book, half of which were negative. It is clear that the “certainty” craved by businesses, consumers and Congress is in short supply.

Chart 1 describes how many times the words “uncertain” or “uncertainty” appeared in the Beige Book since January 2010. Look how recent years have compared to pre-recession years (the 2002 – 2007 recovery), as well as the years of the Great Recession (2007, 2008 and 2009).

In the current period, uncertainty led to a nearly 20% drop in U.S. markets between July and October 2011.   So far, the only antidotes for this problem have been:

  • Monetary manipulation around the globe, as Europe works toward a plan to stabilize its financial system and central bankers begin to loosen monetary policy that had been getting more restrictive over the past several years.
  • Better-than-expected economic data (the U.S. economy in the recently completed third quarter is on pace to more than double the pace of growth seen in the first half of the year) but, expectations remain low.
  • Healthy corporate earnings, which ultimately drive equity prices. But, the bar has been previously lowered, so it’s easy to surprise on the upside.  Regrettably, I seriously doubt we can sustain this growth.

Of course, some uncertainty is likely to remain in place.  There is still plenty of work to be done on our labor and housing markets which could again drive consumer spending.   The 2012 Presidential and congressional election circus will no doubt divert lawmakers attention put solutions on hold until sometime in 2013.  Maybe we can find solace in the words of Pliny the Elder:  “…In these matters the only certainty is that nothing is certain.”

 

 

 

 

 

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