I need to apologise for not updating the blog yesterday but I was out getting sloshed with some buddies while watching the England vs Germany game. Overall, it was a good game, of course England supporters will definitely not agree but it was a great game for the neutrals.
A friend of mine while singing karaoke the other night asked me which way the market was going to go. I told him the only answer I knew, which was "I don't know". Fact of the matter was, in the short term, the market itself does not seem to know which way it was headed. Every day over the past 2 weeks, watching the market was as interesting as watching an episode of "Love" (Taiwanese drama series that never ends)or should I say 2 weeks worth of episodes.
In recent weeks, there have been lots of talk on the possibility of a double dip recession for most of the developed world. Poor economic data coming out from the US has only added fuel to perennial bears like Nouriel Roubini to speak with more conviction on the possibility of a double dip. I believe in one of my earlier posts, I did state that a double dip is a possibility and cannot be ruled out but it is by no means a sure thing.
Even if a double dip happens, it will not be as severe as the one we just experienced in 2008. This I am sure. If a double dip recession occurs, it will not be caused by a global credit crisis like what happened in 2008. History is on the brink of repeating itself with the European countries focusing on managing their fiscal deficits rather than ensuring their economic recovery is on a sustainable path. This is the time when politics take centre stage and political interests overwhelm economic interests, placing economic growth in the back seat while popularity and vote garnering takes the drivers seat. Politicians are pressurized into implementing austerity measures (i.e. Britain, Germany, France etc) when their economies (with the exception of Germany) continue to look shaky. With austerity measures in place, we can expect consumer confidence to falter and government investment to be tepid.
I continue to reiterate my view that the developed economies may be a little premature in their willingness to withdraw stimulus spending and implement austerity measures. Before I start criticising the govts and central banks, I would like to say that the world has learnt from the previous lessons that immediate actions and interventions are crucial to prevent a long term term depression. The sheer amount of money pumped into the global financial system, the near zero interest rates in USA and Japan, the hundreds of billions in pledged stimulus spending, the innovative measures like TARP and "cash for clunkers" have helped the world avert another Great Depression and probably prevented a longer recession. In that aspect, we have learnt our lesson from history.
On the other hand, we have not learnt from our lesson of withdrawing stimulus and tightening monetary policies too prematurely. During the Great Depression, the economy was down in the doldrums from late 1929 till 1932, after which the global economy started to show some improvement and equity markets started to rally strongly (very similar to what happened in 2009).
I attached the chart to show what happened to the market once the central bankers started to tighten monetary policy the moment they saw a recovery in 1932. This led to the equity markets dipping once again but it did not touch its previous low in 1932. This is the scenario that I believe will be very likely if developed nations continue to think about their own fiscal balances and not how their actions could cause a domino effect and put pressure on other nations to implement similar measures.
The holy grail of economic theory in my personal view is "expectations". If govts are able to manage expectations well, they will never need to worry about inflation, economic slowdown or even recessions. Why do I say that? Basically, the world we live in is build on the premise of "make believe". The money in your bank account is just a number, is it really there? I do not think so. The dollar notes in your wallet, is worth no more than the paper its printed on, but somehow you trust in the denominations printed on it. The stocks you buy, they are just names on a screen with numbers flickering next to it. If people stopped believing the stock is worth anything, no matter how well the company is doing, it will still be worthless. IF the man on the street does not think that there is inflation, then they will not be pressurised to demand for higher pay or even hog any consumer goods that they feel would go up in price in the future, thus inflation is controlled.
Why did I speak about expectations in this post? Its because I believe the govts are sending out the wrong signals currently. With them stressing so much on austerity measures and their fiscal deficits, it is no wonder why confidence in their currencies are waning. If you believe your neighbor is going bankrupt, would you lend him money? Its all about belief. If you perceive your neighbor as having a good credit standing, you would lend him the money 24/7. If the man on the street is worried about the sustainability of the recovery, their govts portraying a bleak deficit outlook, how is he supposed to find the confidence to spend his money? Consumer spending will not be picking up and government spending is cut back. That is just a recipe for a double dip. It is by no means a certainty, but if more austerity measures are introduced, we can start to move into a more defensive position for our portfolios. In my previous posts, I have already mentioned the best ways to go defensive on your portfolio of stocks. So I believe we are more than well equipped to manage our portfolios in the event of a double dip.
Now back to watching football.
Best,
SVI
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Hi SVI, would like to exchange blog links.
ReplyDeleteLet me know if ur ok
Sure why not.
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