Odds of Being in Disagreement with the Financial Public

Aaron Weisberg, Director Of Revenue, BHG Financial

Let’s take some time to think about where macroeconomic forecasts were in the summer of 2021 – inflation was expected to be transitory and most forecasts showed the US economy storming ahead with a rosy recovery through 2022 and 2023. Market expectations for interest rates were very slow, policy normalization similar to what the US economy experienced in the decade after the financial crisis.  Plugging these expectations into any “reasonable” loss forecast in the summer of 2021 produced pretty benign results in terms of projected future net credit losses.

Given this backdrop, it was considered a big leap at the time to think about running “stagflation” or “Volcker recession” scenarios as reasonable downturn simulations. These types of economic stress scenarios were well outside, even the darkest predictions for the US economy in the summer of 2021.  After some very thorough discussion among the leaders of our credit risk functions, we decided we felt it was extremely reasonable to assume that there were scenarios where maybe the “transitory” inflation might not be transitory. We felt this could create some reasonable historical parallels to the 1970s and 1980s that deserved some evaluation and thought within the company’s larger credit risk strategy.

Unsurprisingly, these scenarios showed results that would have been considered “highly unlikely” at the time. The reception from key partners was varying degrees of skeptical. This risk seemed so far from the expectations that it was not taken seriously at the time. Strategic emphasis remained on growth while macroeconomic tail risk concerns remained low on the totem pole for strategic consideration. 

Privately, I asked myself or close peers, why we even bothered talking about downside tail risks if they weren’t going to seriously factor into the discussion anyway. As a team, are we presenting our findings in the right way? Should we be prioritizing other things instead, so that the team is still perceived as providing value?

"As leaders, we need to avoid herd instincts so that we can fairly consider all points of view and ensure that the organization is valuing long term sustainability just as much as what is right in front of us at any given moment"

As time moved forward, conditions began to change. Inflation remained sticky and on eventual rise, raising concerns about “stagflation” or another “Volcker recession”. Suddenly, protecting against these exact scenarios became critical to business strategy in the short term. Full strategic sessions on how the company could better prepare for these scenarios began in earnest. From marketing to credit decision-making to collections, the potential impact of macroeconomic stress all of a sudden came to the forefront of discussions again. The previous frustrations quickly retreated as the value of staying vigilant, understanding our role in the organization, and ultimately executing our job became very apparent. Strategic changes began to roll out and ultimately pay off in terms of overall results across the entire firm. Ultimately, not conforming to the wider expectations of others proved to be extremely valuable.

During a few moments of reflection, this was a humbling reminder why it is important to avoid the “herd instinct”, that so often befalls us in leadership positions. It is always easy to agree with the consensus and to avoid being perceived as purposely argumentative. As loss forecasters, this means constantly challenging the baseline economic scenario to make sure we are prepared for the full range of economic outcomes. More importantly though, as leaders, we need to avoid herd instincts so that we can fairly consider all points of view and ensure that the organization is valuing long term sustainability just as much as what is right in front of us at any given moment.

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