Sent: 20-01-2009 11:21:01
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Market Directions: Two Opinions About 2009 (Part II)
The pessimistic view about the economic outlook rests on an assumption that this cycle is fundamentally different to all that have gone before.
The last ATC e-mail commentary before the holiday break outlined the optimistic view of how the coming year might unfold.
Optimism about 2009 rests on a single pillar: that the current cycle is similar to others in its essential features. Each cycle has its peculiarities but, in each case, recession is a way to purge the economic system of excess and redress imbalances that have built up over the prior three or four years. The flexibility of our economies and the ingenuity of our entrepreneurial classes is then enough to force a recovery and create a new cycle (which unerringly duplicates much of what went before).
The countervailing view is that our current predicament is more than simply a cycle repeating itself. It is a breakdown of the financial order which has damaged, if not destroyed, important self repairing mechanisms.
Traditional monetary policy tools operate through a well functioning financial system. Since we no longer have such a thing, monetary policy will not work.
In any event, the ten years prior to 2008 were an aberration. Restoring those times is not an option under any feasible circumstances. Those for whom this period was the benchmark of success will forever be disappointed.
No cycle has been so outrageously supported by monetary authorities. It was apparent at the time and even more evident with hindsight that less dire adjustments were being postponed by a Federal Reserve overly concerned about propping up asset markets. The current adjustment is, at least in part, a need to compensate for the egregious policy failings of Alan Greenspan.
Over a year into the current U.S. recession, U.S. policymakers remain preoccupied with what happens on the southern tip of Manhattan and, in leaving the rest to fend for themselves, are damaging those who really count. Ditto in the UK and elsewhere.
Debt was the wind beneath the wings of consumers. This phenomenon relied on ever rising residential property prices eagerly supported by policymakers around the world with the active encouragement of those pursuing electoral success. Even if prices are restored, several decades might have to pass before they will be allowed to underpin current consumption in the same way.
Even an optimistic view of the world would have to concede that banks will take many years to rejuvenate their balance sheets and claw back their profitability. Recall, in this context, what happened in Australia in the early 1990s after the failure of several financial institutions and the near death experience of others. Remember the debate about whether banks were retarding recovery due to their overly cautious lending practices. Expect this conversation to be happening globally in 2012-2014.
Financial markets will be so heavily regulated and operationally constrained by their government ownership that they will lose their freedom to innovate. Without new financial products, new business opportunities in the real economy will be stifled.
Rapidly expanding government debt will burden financial markets for decades. Luckily, governments can borrow cheaply because business and households are less inclined to do so. Somewhere down the track, government funding of debt might start to compete with private demands. In any case, we are not solving the problem of too much debt. We are simply altering its incidence. The debt problem remains.
The pace of asset price inflation leading up to 2008 was always at odds with the emerging macroeconomic picture of slowing global growth as population growth decelerated and, in places like eastern Europe and Japan, population numbers actually declined. On that front alone, something had to give.
New technologies were a central part of what was happening. Consumers were buying them. Manufacturers were more productive by using them. And, above all, technology facilitated a revolution in the production and marketing of financial products. We might never again be faced with such a technological revolution.
Finally, among the reasons why this cycle might be structurally different from those that went before, there is the influence of globalization. Cyclical diversification among national economies used to be an advantage that might have been lost permanently.
International recession did not always mean that every part of the global economy was equally depressed and suffering similarly. There were often parts in relatively better shape and capable of acting as engines to help stimulate a recovery from recession. With virtually all economies and all major industrial sectors suffering simultaneously, the burden of generating recovery might now simply be too heavy a weight to lift.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.