In a climate where economic planners and market participants are desperate for credible bullish signals on the global economy, it is not surprising that there is hardly any focus on the fine print in the IMF’s semi-annual World Economic Outlook. On Wednesday, the IMF revised its 2010 global growth target to 3.1%, up from a July forecast of 2.5%. But the explanatory memorandum accompanying the revision contains two alarming qualifications.
Firstly, both developed and developing nations will need to prepare for the unwinding of extraordinary levels of public interventions by early next year. Secondly, banks and businesses in emerging markets must service (i.e. refinance) more than US$400 billion in maturing debts, denominated in foreign currencies, over the next six months. Once the two challenges are properly contextualized, it appears that the IMF is pointing towards another serious recession in 2010, not any growth on a global basis.
What exactly have the US$2 trillion worth of stimulus packages achieved beyond the transfer of asset pricing risks from private equity to the public sector? Have they generated sustainable economic expansion, in industry, in trade and in agriculture? Have they created jobs with life after the numerous government-supported schemes? Have they laid recognizable foundations for a consolidation (and growth) in consumer demand?
The empirical evidence proves that the IMF’s cautionary tale is well-grounded; the growth target revision, however, smacks of an excess of faith in the ability of politicians to find timely solutions. Because financial interventions have only succeeded in cushioning systemic risks, not eliminating them. Because the systemic risks were rooted in leverage, and leverage has not been addressed in the comprehensive manner the circumstances demanded. Because the stimulus agendas created huge deficits, and now nobody has any concrete plans to service debt.
“We will stumble along for now and, without doubt, another round of rescue plans will be on conference tables by next May or June,” said a former World Bank official earlier today. “Nobody has the courage to act decisively today.”
Though the process of “stumbling along” will ignite widespread debate in forthcoming weeks, there is enough optimism around to prevent any sharp pullback in either benchmark ETFs (ADRE, ADRU, BKF, EEM, [[FEZ]] and ILF) or in the major indexes (DIA, QQQQ and SPY). This writer is, therefore, standing aside, looking to short across the board as economic and corporate data in November/December (or earlier) begins making the latest IMF forecast look like a pipe-dream.
In other words, though the S&P 500 should be well below 900 if the more-than-formidable challenges which lie ahead are factored in, the vast majority of analysts and investors (institutional and retail) continue nourish the hope that a global recovery, however weak, is very much in play.
A word of caution to the bulls. To buy into equities now implies a dual conviction; that the stimulus packages have worked substantively on the ground and that viable policies to unwind unprecedented levels of government interventions will be in place shortly.