11/29/2009 05:12 am ET | Updated May 25, 2011

The Search for Normalcy

The papers Tuesday seem to disagree about exactly where we are. The New York Times led off by Andrew Ross Sorkin's front page column declaring mergers and acquisitions (M&A) and optimism back, and buttressed by the business section's pumping for Dow 10,000, jostles uneasily with the Financial Times, where John Authers worries in The Short View about money managers getting into the market just to join the crowd and Pimco's CEO Mohamed El-Erian warns that we've hardly started the recovery and that there's considerable pain ahead. "The signs," murmurs El-Erian with Greenspanian opacity, "of inappropriate reversion are multiplying." As for The Wall Street Journal, it plays it cool. For all the happy talk about M&A, the Journal story's key quote comes from Rob Kindler at Morgan Stanley: "It's still too early to call the bottom of the M&A market. I would not be surprised if we continue to have this low level of M&A for the next three to six months."

In fact, the uplift camp finds itself in a trap. The more they talk up M&A, the higher stock prices go -- almost the definition of a rally built on squishy ground.

The situation was pretty accurately summed up in the new BusinessWeek whose cover story, by Roben Farzad, described two camps battling for hearts and minds. On one hand, there's the gang arguing that last year's crisis created a de-leveraged, rebalanced "new normal" that we haven't yet begun to cope with. Who pops up as a proponent of this new normal but El-Erian, which makes you wonder whether he and his similarly gloomy boss at Pimco, William Gross, are talking up their own book. On the other side, there are the "old normalists" who believe we're about to bounce back to our former levels like tackling dummies. The crisis was an anomaly of sorts, temporarily knocking a robust economy off its stride. We're not about to fundamentally change. We are who we are, and that's pretty decent. (These attitudes have a real effect on political issues like regulatory reform and even Federal Reserve interest rate policy.)

Give BusinessWeek credit for more than just getting issues out in the midst of selling itself: The magazine has enough sense to note that the real question here is the squirrelly definition of "normal." This is the same magazine, alas, that late last year was saying that given the crisis we had to retrospectively shrink all those inflated growth figures from the previous boom, suggesting, in other words, that it had a "new normal," and it was late 2008. These two perspectives obviously sit uneasily with each other, but hey, it's the magazine business. The idea of "normal" suggests that there is a kind of optimal capacity or efficiency in the economy that is then accurately mirrored (or not) in various metrics, from M&A to stock prices to unemployment. In other words, "normal" suggests a point of equilibrium, theoretical or real, that like a Platonic ideal exists at any given duration in time, from a day to a year to a century. For true believers, this "normal" can accrue political, moral, even religious meaning. We will always reach value, truth and beauty if we just wait long enough; this is comforting, but it's a little like getting to determine when a football game ends.

Various observers take very different views of "normal." Some believe that "normal" exists as a deep, inherent attribute of the economy, linked somehow to culture or demographics or God, which suggests that we can try to emulate "normals" that existed, say, in the 1960s -- or at least ransack through history trying to find "normals" we like. Others view "normal" as more dynamic. In the Financial Times, El-Erian predicts "it will take years for unemployment to return to its natural rate, even after the natural rate shifts upward." That shifting natural rate is a rough approximation of normal.

But there's another view of "normal" that has come out of the crisis stronger than ever: that "normal" doesn't exist at all, that the belief in market equilibrium is part of the kit bag of ideas, including the efficient market and rational expectations, which have been effectively undermined. Authers in the Financial Times goes into those arguments in a clear-minded survey Tuesday. The trouble, as Authers recognizes, is that there's nothing to replace the solid base, the certainty that the efficient market, with its underlying belief in normal equilibria, could provide. Investing is a human endeavor. And money management is both a social and a bureaucratic enterprise pursued by mortal, anxiety-prone, not always prescient folks. Investors, from Aunt Mary to CalPERS, need some method that makes sense (or that at least is socially validated, the more the better, which explains the power of crowds) and some metric that feels "normal." Without it, the whole enterprise, from money management to M&A, feels like a total roll of the dice.

We live by fictions; and we seek refuge in crowds. The next best thing to being right is to be wrong with everyone else. And the crowd, as we should know very well by now, has immense power to resist whatever reality -- whatever "normal" -- lurks out there, sometimes for a very long time. Perhaps (this is an old Bush administration mantra) that underlying reality of "facts" can be reshaped entirely by whatever conventional wisdom is being peddled, and that if we can just achieve enough momentum, we can actually pull off Larry Summers' takeoff. Put that way, the current tug of war is occurring between those who believe in "facts" and those who simply believe in the trend. Caution is probably in order. We may not have changed fundamentally since last year, but we're not quite the same either. The one thing that's certain here is that there's no certainty at all.

Robert Teitelman is the editor in chief of The Deal.