A V-shaped global recovery is within sight, so the bears should think about the prospect of giving ground.
You don’t ask a weatherman to know which way the wind is blowing. Analogously, you don’t ask a bear who has got the recent downturn correct to predict when the market will turn. Symmetrically, you should not ask somebody who got the last bull move right as to when the market will go downhill. Equivalently, the same rules apply for the forecasting of GDP as of the stock market. And there are two primary drivers of the stock market — GDP growth (via profit growth) and inflation (via costs of production). No one is talking about inflation anytime soon. Which leaves us with the centre of attention — recovery in real activity.
There have been several pointers towards the likelihood of a V-shaped global economic recovery. The first pointer was the massacre itself, Sept-Dec 2008. Recall that until mid-September 2008, the world was declining, the global recession was on, and stock prices around the world had collapsed by close to 30-odd per cent. The bears were in control, and the only question was whether the decline in the lead country, the US, would exceed or not exceed the decline during the last great recession of 1980-82. A world has passed in the last six months, but the fact remains that in August 2008, the debate was whether recovery would begin by end year 2008 or be delayed by a few months into 2009.
In August 2008, the dire forecasts of world growth (including collapsing growth in the emerging economies led by China and India) were nowhere close to target. The de-couplers were winning: yes, there was a slowdown, but not a catastrophe predicted by the naysayers-doomsayers. But then the unthinkable happened. Perhaps goaded by the bears whose forecasts needed to be correct (!), the US authorities made a catastrophic mistake — they let Lehman go. And with that the Humpty Dumpty structure of capitalism came tumbling down and the worst global crisis since the Great Depression became just the worst global crisis (the Great Depression missed out most of the non-industrialised world).
This little bit of very recent financial history is important in understanding the prospects for global recovery in whatever shape it might take. Because the decline in real activity was so synchronised and so large and so fast (eg industrial production down by more than minus 10 per cent, exports and imports both down more than 20 per cent etc), it set into motion policy responses that would otherwise have not been forthcoming.
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The world, and the policymakers, soon realised what a mistake letting Lehman go had been. But rather than worry about “who is to blame” (that was left to the popular media), the talk, somewhat surprisingly led by the IMF, was to act fast with all fiscal and monetary guns blazing. And act fast they did. So the first pointer towards the likelihood of a V-shaped recovery is given by the magnitude of the decline, and the magnitude of the policy response.
The second pointer is the old magazine cover conventional wisdom. We were told that this was the end of capitalism. Quotes of Marx predicting just such an event circulated in cyberspace. Journalists had a field day, from left-over Marxists to over-eager socialists. The third major pointer was from the post-Lehman correct bears; the arrogance in their certainty was overwhelming. In particular, how with each passing month, the bottom was signalled to be further and further off. And for a while, it did seem like pure genius. Each forecast, and target, was met within a month of the pronouncement.
The fourth pointer is the new vision of central bankers: a bubble-free world. Apart from being a downer for the kids (no soap bubbles and no bubble gums), this wisdom is likely to be just as false as the previous god that failed — inflation targeting. Over the last twenty-odd years, the world has witnessed a steady trend downwards in world inflation. The central bankers claim that this was all due to the holy practice of strict monetary control via inflation targeting. That this could not be true can be observed by noticing that all countries reduced inflation — countries that don’t have a central bank, and/or countries that did not believe in inflation targeting, and every country in between. With bubbles, the same dilemma is posed — what is the precision of the regulator in identifying bubbles? And who will regulate this regulator when it makes a mistake?
The world has only just witnessed the beginning of a possible beginning of recovery. It really is too soon for the hibernating, long-forgotten bulls, to even smell victory, let alone have it in sight in their binoculars. Given all this need for caution, what should one be looking for? At the fundamentals. That gets us into an understanding of what is similar and what is different this time around. And how different are the circumstances in the US today to what Japan faced in the early 1990s? The argument about only an L-shaped US recovery is predicated on the US going the Japan way. The arguments for and against an L-shaped recovery are left for a subsequent article. But the conclusions can be mentioned now. Yes, the world is different because of the emergence of China and India as important players in world growth. That was not the case even a decade ago. Second, Japan entered its period of stagnation with a highly overvalued exchange rate. The US is entering its future with a mildly undervalued exchange rate. As far as US and global growth is concerned, these are crucial differences — and differences that make a V-shaped global recovery a not too distant reality.
The author is Chairman of Oxus Investments and anchor of Tough Talk, a talk show on NDTV Profit