Betting on a recovery
Almost everyone seems to believe it, from Bank of Canada Governor Mark Carney to the person in the street. The Conference Board of Canada reported recently that the level of consumer confidence in this country took a big jump in August and now stands at its highest level in more than a year.
There’s no doubt that investors believe better times are ahead. In fact, they’ve been betting on a recovery since mid-March. All the major world indexes have scored big gains since then. The TSX is among the global leaders with a gain of more than 40 per cent since hitting its March bottom.
But even with that surge, entering September it was still 28 per cent below its all-time high of 15,154.77, reached in June 2008. Almost every major stock in the Composite Index is trading below its 18-month high. So there is still a lot of upside potential left. How quickly it will be realized depends on whether the recovery has truly begun.
Prof. Nouriel Roubini of New York University, this generation’s version of “Dr. Doom”, sounded yet another warning recently, saying the economy is at risk of a double-dip recession — a W-shaped recession as it’s called. The danger, he says, is in the exit strategies governments employ to end the massive stimulus programs that pulled the world back from the brink of financial disaster.
“Policymakers are damned if they do and damned if they don’t,” he wrote in a commentary posted on the website of the Financial Times of London. “If they take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into stag-deflation (recession and deflation). But if they maintain large budget deficits, bond market vigilantes will punish policymakers. Then, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation.”
He also warns that commodity prices, especially for energy and food, are running ahead of themselves and are not justified by fundamentals. If oil should surge back to US$100 a barrel, it would jolt the world economy. The bottom line, he suggests, is that at best the global recovery will be anemic and at worst we will slip back into recession. (You can read the entire article here.)
Roubini’s pessimism is apparently not shared by a majority of economists but there is still no clear-cut consensus that the worst is behind us. On August 11, The Wall Street Journal published the results of a survey of economists on the state of the global financial system. A small majority – 27 of the 47 who responded – agreed the recession was over. Another 11 felt we should see the bottom within the next couple of months. That’s hardly a ringing endorsement of the “happy days are here again” viewpoint.
But even with all the reservations being expressed, it is significant that hardly anyone is talking about a depression any more. That’s a far cry from last autumn when the world was deemed to be falling over a cliff. Oh sure, there are a few economists who believe we are in the grips of a Kondratieff winter that will last for several years. You can read up on the theory, which suggests the only way to preserve your wealth will be to own lots of gold, at www.kondratieffwinter.com
However, as investors, we need to weigh the probabilities. No one can predict the future with certainty but we can use history, recent events, and trend lines to get a handle on what is likely to happen going forward. Here are some key things we know at this time.
1. Political leaders and central bankers did a remarkable job in staving off a global financial meltdown. To do so, they had to make some extremely difficult and in some cases unprecedented decisions. The fact they were able to succeed is a testament to a new level of international co-operation that did not exist at the time of the Great Depression.
2. All the indicators, from house sales to GDP numbers, point to the fact the decline has slowed and, in some countries, ended.
3. Investors and consumers are no longer in the grip of mass panic. Emotional balance, which is critical to future growth, has been restored.
Yes, there are big challenges ahead and there will undoubtedly be setbacks along the way, perhaps some major ones. But I suggest the time has come to breathe a collective sigh of relief that we collectively dodged not just a bullet but a potential economic nuclear bomb.
Adapted from an article that originally appeared in Gordon Pape’s weekly newsletter, the Internet Wealth Builder. Try it for one month (4 issues) for only $13.95 plus tax. Details here.
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