"Risk is what's left over when you think you've thought of everything."
-- Carl Richards
The world is full of risks. There's no shortage of them today: Deficits are enormous, Europe is cracking, and pension funds are underfunded. These are serious risks. Some will turn into crises.
But we love to exaggerate and extrapolate. Nine times out of 10, the biggest risk isn't what's making headlines. Risk is the anonymous lurker no one's prepared for. Rarely will what's popular to worry about turn into a crisis -- at least, anytime soon. There's a half-serious rule of thumb that once Newsweek puts a warning on its cover, the risk has already passed. Things change, and there's no better way to prove it than surveying the graveyard of past crisis warnings.
Here are four from the past few years.
2008: Peak oil
For as long as we've been drilling oil, we've been worried that we're about to run out of it. In 1914, the U.S. Bureau of Mines predicted American oil reserves would be depleted in 10 years. In 1939, the official prediction was 12 more years before the wells ran dry. In 1951, the Department of Interior warned that we only had 13 years left.
Peak oil fears popped up again around 2007 and took off in 2008. "Before long $100-a-barrel oil will be regarded as 'the good old days,'" energy analyst Robert Hirsch said that year. The world wasn't prepared for a peak in oil output. "There is no good news. Nobody is really doing anything," he warned.
The fear was nearly universal. "Wake Up, America. We're Driving Toward Disaster," wrote The Washington Post. Salon, among countless others, warned of "peak oil -- that moment when supply stops growing and begins to decline, while demand continues to chug along." Alexey Miller, CEO of Gazprom, the world's biggest energy company, warned oil would hit $250 a barrel in "the foreseeable future."
Four years later, world oil output is at an all-time high, and oil prices are down 40%. U.S. oil production is the highest it's been in 14 years, rising consistently for the first time in decades. Adjusted for average hourly wage growth, gas prices today are nearly identical to where they were six years ago. In 2008, the International Energy Information Agency predicted world oil demand would be 96 million barrels per day in 2012. Now, the U.S. Energy Information Administration puts that number closer to 89 million barrels per day. Global oil supply was 3 million barrels per day higher last quarter than it was in 2008.
Hirsch warned that nobody was taking action to solve the energy problem. But they were. Fracking technology has led to a boost in production. Vehicle miles driven has dropped, and average gas mileage has jumped as consumers favor more efficient cars. People adapted -- quite well -- to what looked like an inescapable catastrophe. They usually do.
2010, 2011: Double-dip recession imminent
The last recession officially ended in the summer of 2009 (though it's an irrelevant distinction for millions still left unemployed). Ever since, there's been a race among analysts to call the next recession's arrival.
This began in earnest in mid-2010. "Economist Nouriel Roubini says the much feared double-dip recession has already arrived," one headline wrote that year. "Don't Fear Double Dip, It's Already Here," read another.
By summer 2011, people had forgotten those false alarms and were ready for another round. "Time to Say It: Double Dip May Be Happening" warned The New York Times. "10 signs the double-dip recession has begun," wrote MSNBC. "Back toward a US double-dip," said the Financial Times.
Wrong, wrong, and wrong again.
In hindsight, I think too many held the idea that any slowdown in economic growth meant a new recession was imminent. Worse, they assumed a new recession would bring calamity akin to 2008.
Neither is a good assumption. Even during expansions, growth ebbs and flows all the time. It's never a straight line up. Just as with stocks, periods of economic volatility are perfectly normal and usually don't signal anything other than noise. And in hindsight, much of what looked like a sharp slowdown last summer disappeared as economic numbers were later revised upward. Forget predicting the future; we don't even know what happened in the past.
There will be more recessions -- many more -- and their risks shouldn't be underestimated. But as a group, we tend to overestimate their frequency and effects, particularly today, with the wounds from 2008 still fresh. What's the saying? "Economists have predicted nine of the last five recessions."
2011: The death cross means a market crash awaits
Last August, the Dow (^DJI +0.83%) triggered a technical indicator called the "death cross," when its 50-day moving average crossed below its 200-day moving average.
Already gripped with fear of another leg down (double-dip!), traders, journalists, and pundits turned bearish with zeal. The death cross, many claimed, was a surefire sign that stocks were poised for big losses.
"'Dead Cross' Triggered -- Look Out Below Large Caps," wrote CNBC. "Stock Market's Death Cross Looking More Deadly This Time," warned one analyst.
It went on for a good week straight. The death cross, we heard, foretold impending doom.
So how did it turn out? The death cross allegedly meant large-cap stocks were about to plunge. Yet in the year since, they've returned nearly 30%. The only thing deadly about the death cross was being duped into believing it.
2005-2009: The dollar is about to plunge
The Federal Reserve has created a staggering amount of new money, and the federal government is running massive deficits. Someday, somehow, this will very likely set off what Warren Buffett called "an onslaught of inflation."
Someday.
Until then, those who have heralded an impending collapse of the U.S. dollar and surge in inflation -- and there have been many of them for many years -- will continue to be humbled.
As best as I can tell, the collapse-of-the-dollar crowd peaked in 2009. I was once a member. As the Fed cranked up its printing machines, it seemed unthinkable that high inflation and a collapse of the dollar weren't far behind. "Hyperinflationary Depression Remains Likely As Early As 2010" was the title of one widely read 2008 report, in which the author defined hyperinflation as when "the largest pre-hyperinflation bank note ($100 bill in the United States) becomes worth more as functional toilet paper/tissue than as currency."
Nothing even close has occurred. Inflation -- that is, both the official CPI numbers and a privately calculated version compiled by MIT -- have been tame for four years. The U.S. Dollar Index, which measures the dollar's value against a basket of global currencies, traded for about 80 in 1990. By 1995 it traded for about 80. By 2005, it was 80. Today it trades for about -- you guessed it -- 80. There has been volatility all along, but the dollar's value has held up against other global currencies for decades.
What happened? Two things dispelled the doomsday predictions. Many felt the dollar would be abandoned by global investors as the U.S. tipped into recession. In reality, the opposite was true, as other global economies, particularly Europe, were in far worse shape. The dollar, for all its faults, became the mark of safety. And the vast majority of the new money printed by the Fed never made it into the pipes of the economy, as banks had no appetite to lend, and consumers worked diligently to shed debt. Doomsayers have (so far) gotten the mechanics right but the consequences wrong.
Coming up next...
Oil production will eventually peak, we will experience more recessions, and inflation is a real risk. But the more something is in the headlines, the more prone it is to distortion, rhetoric, and overreaction. Real risks are almost never what everyone's worried about. Quite the opposite, as Richards reminds us; they're what no one is worried about.
