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.
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
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
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.