The camp that believes the economy will surprise to the upside continues to grow. For example, Dennis Gartman, Doug Kass and Byron Wien have recently put "surprising economic strength" near the top of their 10-best-surprise ideas for 2010, and Goldman Sachs strategist Jim O'Neill is also looking for an upside.
Though not everyone on Wall Street is expecting economic strength, it does look like that's the budding smart-guy consensus.
On the Good Ship Au Contraire
I bring this up because it leads to a great example of contrary opinion, as demonstrated by my friend Jim Grant of Grant's Interest Rate Observer.The setup: Last summer, when Grant took the view that the economy would surprise to the upside, I think it caused many people to gasp. The world economy had, for all practical purposes, come to a dead stop.
Think about the economy as a moving object. Before the bubble burst, we could say the economy was traveling at 60 mph. After the burst, it was destined to travel at 20 mph for a while. Then last spring it was at zero.
Back to Grant: Had the economy been a stock that had been badly mispriced because everyone expected the economy to remain weak forever, he surely would have had a double or triple by now, even though the economy has picked up only modestly (though dramatically compared with expectations), which has caused some people to alter the views they held six months ago.
When good things happen to badly mispriced assets
That's how contrary opinion works. It causes assets to get so badly mispriced that if even a slight alteration in perception comes along -- never mind an actual change in the underlying facts -- prices can change quite dramatically.As for my current economic opinion, I'm still not convinced that we are going to have any sort of self-sustaining economic recovery in the wake of the burst real-estate bubble. Though money printing can do a lot of things, I doubt it can singlehandedly create the jobs we need. Thus I think folks who are expecting an upside economic surprise leading to a return to prosperity are likely to be disappointed.
Having said that, I'm keeping my eyes open, because with all the money printing and the willingness of the U.S. government to bail out problems, who knows what might be possible.
My investment positions are all set to capitalize on money printing, and I have no money at risk, so to speak, on the idea of economic activity picking up (or losing ground, whether as a result of the funding crisis just ahead of us or for other reasons).
To conclude: Contrary opinion works because it capitalizes on assets that are mispriced, both too high and too low. And, importantly, it lowers the risk if you are wrong. Employing a contrarian investment strategy doesn't ensure investment success, but it is a good place to start.