It is a great comfort to know that those who were playing blind man’s buff while the economic crisis was fermenting now see a swift recovery on the horizon. Ben Bernanke, Chairman of the U.S. Federal Reserve, said recently “the U.S. economy appears to be stabilizing on many fronts and that recovery is likely to begin this year”. He went on to say the recession would be over by Christmas. In similar vein, Alastair Darling forecasts economic recovery getting underway before the end of 2009. What a relief; for a moment, things were starting to look a bit sticky. These people missed the deepest economic contraction since World War Two yet they now see sunlit uplands? We can only recommend a trip to Specsavers.
What is the reason for this outbreak of optimism? Well, the stockmarket has bounced and many commentators are now talking about further gains. Unemployment might be rising but not perhaps as fast as it was; house prices could be close to the bottom while many parts of Asia are still recording economic growth. Maybe things are not quite so bad after all? Then, there is a plethora of stimulus packages doing the rounds. So have Messrs Obama, Brown, Bernanke, Darling, King et al yanked the irons out of the fire and saved the global economy?
Call us ever so slightly cynical but something doesn’t quite add up here. Economies that have become dangerously dependent upon consumption will require a considerable amount of time to re-balance. Consumers need to pay down mortgage and credit card debt; they also must save more for their retirement. From being close to zero, savings rates are now rising. As such, it will be an impossibility for consumers to both save and spend more. That message will be as welcome in Downing Street as Joanna Lumley but reality decrees a rapid economic recovery is highly unlikely.
The post war era witnessed increasing use of government deficit spending both here and in the U.S. It also saw greater acceptance of personal debt, a process that reached its zenith over the last decade. Politicians and central bankers have repeatedly attempted to prevent recessions by a combination of borrowing and low interest rates. However, there is powerful evidence that over longer periods of time, progressively larger debt stimulus packages are required to achieve the same percentage boost to GDP. In short, the law of diminishing returns asserts itself. This sham has now run its course; Bernanke and his ilk are not the saviours – they are part of the problem.
As for the stockmarket, it is not unusual to see powerful rallies in a bear market. There were several after the 1929 crash. That said, even with our somewhat puritan views, we have found some interesting individual opportunities. However, a continued general advance is one we treat with extreme caution. Never forget, asset managers have a vested interest in talking the market up. This is not a ‘normal’ recession and we therefore do not expect a ‘normal’ recovery. Despair may have turned, improbably, to optimism within weeks but we prefer not to don rose coloured spectacles and won’t be dazzled by the light all too many see at the end of the tunnel; our concern is that, after the euphoria subsides, it turns out to be an oncoming train.
John Newsome can be contacted on: 01423 705123 or email:john.newsome@williams-im.com
