“Just how red-hot is the current worldwide expansion? ‘This is far and away the strongest global economy I’ve seen in my business lifetime,’ U.S. Treasury Secretary Hank Paulson declared on a recent visit to Fortune’s offices.”
If you weren’t up on current events, and you didn’t know that Hank Paulson’s tenure as U.S. Treasury Secretary ended in 2009, you could be forgiven for thinking this quote describes the current world economy. Over the last several months, U.S. stock indexes have hit all-time highs on multiple occasions. The Nikkei Index in Japan recently had the largest single gain in its history, and European stock indexes are providing investors robust returns.
But Mr. Paulson isn’t the treasury secretary today and this quote isn’t new. Instead, Secretary Paulson uttered these words to Fortune magazine a decade ago in July 2007, weeks before the global markets shuddered in what was the beginning of the worst financial crisis since the great depression. In the 15 months after making this statement, venerable investment banks Bear Stearns and Lehman Brothers ceased to exist. Fannie Mae and Freddie Mac would be placed in financial conservatorship by the federal government, insurance giant AIG would require an $85 billion government bailout to remain afloat, and U.S. banks would get a $700 billion capital injection from the treasury. Secretary Paulson was the former head of Goldman Sachs. As the sitting U.S. Treasury Secretary, he was seemingly better positioned than anyone to read the markets and understand the state of the global economy. How could he, of all people, have been so wrong?
The answer may be that he wasn’t wrong at all. In July 2007, the global economy may have been the strongest in Secretary Paulson’s lifetime. But debating whether he was wrong or right misses a valuable lesson this quote teaches. Secretary Paulson’s statement is an important reminder for investors, advisors, and trustees excited by today’s double digit market returns. Even the best and brightest who accurately see a thriving economy today cannot predict the state of tomorrow’s markets. This is especially important for anyone who owes a fiduciary responsibility for managing or advising others about how their money should be invested. Prudent investment management of other people’s money requires more than the ability to take the temperature of the markets on a given day.