Global Agenda: Unfinished business

By PINCHAS LANDAU
September 9, 2009 12:44
4 minute read.



There is a widespread feeling that, come September, global equity markets will sell off. That is not necessarily a bad thing, because even bullish analysts accept that the markets have generally come too far, too fast, and need to cool off. A drop of 10 percent, or even 20%, after the tremendous surge that has taken place since March, will, in this view, provide the necessary and overdue "correction," after which a more measured advance may resume.



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September is the ideal time for any such sell-off to take place, because - for reasons that no one has ever convincingly explained (although innumerable hypotheses exist) - it has by far the worst historical record of any month for equity markets. It would therefore not be at all surprising if we were to see prices falling next week and/or next month, even as the news background continues to be generally positive, as it has recently been.



In other words, from a "big picture" perspective that considers the state and prospects of the broader economy, whether at the national, regional or global level, it is of little consequence if share markets fall back now. What really matters is whether the key assumptions underpinning the bullish view - namely, that the recession is over, with growth set to resume shortly (or already under way), and that the massive stimulus measures undertaken during the crisis can be unwound gradually - are valid.



If they are, then the conclusion drawn by many people during the crisis months, that the economic paradigm of recent decades is irretrievably broken, will be proven wrong. Horrendous though it was, the crisis proved manageable. Things, perhaps many things, require repair and reform, but the consumer-driven economy has survived and will rise anew.



This is the essence of the bullish case, and the reason why so many people - especially noneconomists - find it difficult to swallow. They were told by all the great and the good that this was the most severe economic crisis since the Great Depression of the 1930s. Yet they are now being asked to believe that "the Great Recession," as the slump of 2008-09 is now being widely labeled, is effectively over after only 18 months, of which some six to nine months saw intense declines in all economic parameters.



They find that hard to square with the "worst since the 1930s" story, and - more relevantly to their own lives - hard to square with the weakness in labor markets (everywhere), housing markets (in the badly hit countries and states in the US) and capital markets (where recovery has been partial and patchy). At the end of the day, they don't believe what they are being told.





The issue of belief, aka confidence, has been a prominent theme in this column for a long time, and it is likely to remain so. People don't believe their leaders - even Obamania is fading, let alone "leaders" like Gordon Brown - and they certainly don't believe the bankers, whether central, commercial or investment, who concocted the poisonous stew and yet continue to do very nicely, thank you. Because of this loss of trust, lack of confidence and fear of being taken advantage of, people are no longer ready to spend and consume as they did in the past.



That is enough to destroy the old paradigm, because it was built on credit - and credit demands confidence, credibility and even credulity. The world is engaged in what the economists call "deleveraging," which simply mans using less credit. The supposed "solution" to the crisis has been to socialize private debt (i.e. transfer existing debt from the private sector to the public) and to provide money to the general public (borrowed from the same general public's later years or offspring) to facilitate further spending in the here and now.



Alan Abelson, the veteran Barron's columnist, perceptively noted that most of the massive stimulus programs rolled out around the world are variations on the "Cash for Clunkers" approach used in Germany, America and elsewhere to persuade people to buy new cars and thereby keep the auto industry's production lines ticking. Bring in your old corporate bonds, your crumbling infrastructure and your unpayable mortgages and bank loans and we will give you money or loans backed by the government. Your part of the deal is to go and spend the money.



But people are reneging on their part of the bargain. There has been a
sharp swing away from excess spending and back to saving and paying down debt. If this behavior carries on, the stimulus strategy will fail and the economy will enter the second leg of the "Great Whatever-this-turns-out-to-be."



But coming after the hopes raised by Obama's election and the apparent recovery of the last six months, the next downswing will be characterized not just by shock but by disappointment. We have seen hope morph quickly into baseless euphoria, and we can really do without disappointment mutating into despair.



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