“You don’t know who’s swimming naked until the tide goes out.”
By Haresh Soneji, CNBC-TV18
Every time she is faced with an issue, my colleague at work would ask, “Haresh, I have a question”. She would have probably arrived at the answer all by herself, but would need a second thought on her analysis. I am currently faced with a similar dilemma. Last week when I met a few money managers and heard several on them on our channel, I wondered why there was a BIG divide among them and the economists. I’ve been thinking aloud with the money managers and probably have the answer, but expert opinions do matter. After all, it is them who pump the real cash into the markets.
Here’s the evolving picture. It all started mid-March with traders expecting the economy to pick up momentum with the government led stimulus packages across the world. Reflation trades sent commodity prices rocketing and equity markets followed. A reflation trade is not real demand, but a bet that the economy will rebound. This led to commodity prices surge up to 100% and equity markets across the world surging 35% plus.
Being the biggest pull back rally, the money managers were quick to bounce on the opportunity. Over the previous few weeks, almost all money managers have called this pull back a new Bull market. A ‘V” shaped recovery from the financial mess the world is in seems surprising. But, the money managers believe it to be so. Even the most conservative agencies – IMF feels that the global recession is deepest since the Great Depression and doesn’t seem to recover fast.
Morgan Stanley, in its research report mentioned, EMs continued secular bull market is on. Fidelty feels a new bull market has started which will last several years. Goldman Sachs macro strategy teams feel that the worst is behind us. Citi feels that conditions of global economy look marginally better. The Indian money managers seem to be taking a cue from them talking up the market. But, somewhere they are not confident of ploughing the money they are sitting on, awaiting an opportunity. A small word of advice from the novice – one can rarely time the market.
These are some of the reasons based on which experts vouching for a new bull market. The justifications they give all appear to be weak. Some of them are mentioned hereunder.
- Investors will get frustrated sitting on cash.
- It was an oversold market.
- The world economy has bottomed out.
- The worse is behind us.
- The pace of decline has slowed.
- Month on month numbers are looking better.
Clearly, these justifications look weak to me. The fact of the matter is that many of the fund managers have missed a major part of the pull back. The component of cash in their holdings was high and they have under performed considerably. And investors are forcing them for returns. So, they need to plough the cash and they need a reason to talk up the market. Speculators are buying the argument. But, to my mind, they just appear to be after thoughts.
So far, so good
The economists’ views are radical and worth pondering upon. Here’s a caveat. I am an economist and to that extent my opinions may be biased.
The argument starts from the fact that any government will try to pump prime the economy, when elected to power. A large part of the world economy was running for elections. And a new government will give a fight before calling it quits. This is one of the reasons for the short term build up. Yes, the focus is on jump-starting the economy. That’s fair. But, it will lead to further global imbalances.
The other key reason is to remain in denial of the depth of the financial mess. The IMF now states that the mess would be close to $4 trillion. Wall Street managers refuse to buy this. They refused it, when IMF said it was around $1 trillion in mid-2008. So, denial is an issue with money managers. Former chief economist of IMF says, “Recovery is likely to be slow. We go down and we stay down”.
But, the plan that the US is following in flawed. The world looks upon US as the creator of the problem and now the saviour. But, they don’t seem to be doing any good. Economists the world over seem to be taken a chapter from Keynes asking US to stop throwing good money after bad. Joseph Stiglitz, respected Nobel Prize winner economist, feels the government is aiding the industry and not fixing the system. The other issue is the conflict of interest at the White House as some advisors have close ties with Wall Street. Even Timothy Geithner is a Wall Street guy. So, the focus is on short term measures and not long term issues. The short term strategy will lead to a new bubble. in Stiglitz words, “I give it six months before it becomes undeniable that the current system is hopelessly broken”.
Stephen Roach, chairman, Morgan Stanley Asia, also an economist, writes that depression fixation is the issue with the world leaders. Authorities are failing to address the root cause of the current crises and recession. Roach says, “Depression Foil might end up promoting a false recovery driven by unsustainable rebound in demand. Put it together and it smacks of a dangerous sense of déjà vu”.
The conclusion therefore is to remember the world is in a financial mess where visibility is poor up ahead. New governments across the world will try to jump start economies. But, that needs a lot of commitment. Once the short term measures fail, a black hole situation exists. The probability arises from the fact that the US handling of the situation is flawed and opaque. These are set of constraints that will guarantee failure. On the other hand, consumer confidence is low and consumers are even delaying their spend on necessities. This is evident from the CNBC TV18 Boston Analytics Consumer Confidence Index. Consumer confidence is a lead indicator of any rebound in the economy. There are no positive signals as yet from this front.
Finally remember, the economist have no vested interests in pulling the economy down. On the other hand, the money managers have an inherent interest of talking the market up. The BIG divide question is which side of the argument will you buy?
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