As world markets continue to rally in the face of tax cuts, stimulus packages, monetary easing, various new social programs aimed at protecting the middle class from the impact of the economic downturn, there are indications that the recent revival in economic activity is going to bring about some positive surprises on a wide scale. Both investor and consumer sentiment are indicative of a slight but steady revival of confidence, and if that attitude is sustained, financial speculation and reckless credit expansion by governments may well extend this rally into the winter season.
Perhaps the most important signs of revival are coming from Asia. Japan has reasons to be optimistic that its new government will finally be willing to tackle the pressing issues of the past decades with some credibility and determination. The emerging behemoth, China, has not felt the impact of this crisis as strongly as other nations have, and with a bit of luck they may eventually come out as a stronger, more balanced economy once the crisis dissipates. The resurgence in the U.S. means that the Indian IT sector is finally seeing some revival in demand. In Europe the social programs in place have mitigated the impact of the economic collapse to some extent, and the more balanced economy of the continent may be better placed in a revival led by Asia, as exports pick up, and commodity demand increases.
The sick man of the global economy is America. Here the problems are a lot deeper, the remedies ephemeral, and the analysis unrealistically optimistic. In the U.S. there is a spending infrastructure built on the notion that the expenses of the American consumer will continue to be paid off by others, yet it is highly suspicious that this infrastructure will survive the severe effects of the asset deflation which we have had to live with during the past few years. If government efforts can revive the optimism of the American consumer, perhaps the illusion of wealth can be maintained for a while. But it is unlikely that we’re going to see a return of the good old days of the 90s or the early 2000s any time soon.
And without America, how long or how deep can a global recovery be? Even if we propose that the American economy will benefit from the resurgence of China and other emerging markets, the necessary readjustments in the economic structure towards a more export-oriented model would take years to be implemented, and to mature. In this context, it is hard to see the recent bullish action as anything more than an upward phase in a secular bear. Our assumption is that people are and will be forced to change their attitude to economics and prosperity in this country and abroad. The market appears to believe we’re wrong, but we still see that the weight of evidence overwhelmingly supports the volatile case of a multi-year bear.