Life As It Goes By

Here we go again. The billion dollar question, are we at the end of the recession? Recently, the markets have got really heated up and all of a sudden, recession no more. The first thought that came to my mind was bankers must be busy cashing out their profits now, having booked a record Q2 earnings for themselves. This could save the whole year. But who really want the bull’s run to end? The DJIA has risen from 6,440 to 8,799, a whopping 2359 or 36.6% jump! Everyone who I know is in the market for the past few months is putting up an all-smile face right now. Making money in this worst expected recession makes one feel like god.

I could only explain that this must be the great work done by the Obama administration. The government injection had brought forth an enormous impact on the economy. There is a saying that the performance stock market is an indicator for the economy. It seems like the measures have worked tremendously well, just like the right antidote to the subprime poison. How could they not work? Based on Keynes’ teachings, government spending (like an invisible hand) has a multiplier effect. By pumping few hundred billions of dollars, you would expect trillion of dollars in return. The difference is that these funds are currently spent on a handful of financial institutions. Of course, these funds could be used to invest in the markets. Where else can one find with better returns. There got to be someone out there who might have tightened their belts but with lots of money to spare. Not to forget, there are other government monies around as well. In some of the Asian stock markets such as Hang Seng and KOSPI, things are almost the same as in 2007.

These signals give hopes of recovery and raise overall confidence at the same time. This is natural because if you are not going down, then you must be going up (just like how high and low tides work). The only concern is, will the prices for goods i.e. inflation then go up too? This is what the worried economists warned about: the W recovery. If this is according to what the economists expected, then we would be reaching the end of the first “V” of the “W”. We should prepare for the dive. That would be the case if you are one of the believers.

The thing is economic indicators (there are more than 50 or even 100s of them) are not always forward-looking. It’s true that the reason we use indicators is that history repeats itself and hence, by detecting the trends similar to the past, we shall be able to predict what is to come. However, this is also a self-fulfilling prophecy. Just like in a casino, you can see people scribbling the results of each bet on a piece of paper, hoping to find a winning pattern, whereby the odds (or probability of winning) for each game is the same. Indicators such Consumer Confidence Index have their own limitations. I mean, what does really the index tell us? I feel that the economy is picking up but I am preparing for the worst. So, am I confident or not? It is really subjective and of course, one can overcome this by selecting a large sample size (but then you face the problem of getting focus groups). Well, a wise way to go to get a collection of indicators and try to paint an overall picture. Even so, these telling signs should give an idea of what is going on. You still have to make your own judgment.

As for what I think of current situation, I feel that a turning point might be coming soon (in next 1 or 2 quarters) though the likelihood of going up is equally there. I am more for a “W” kind of recovery, if not “V” + “U”. I believe the government policies are effective and for a certain period of time, stabilization should be sustainable. After that, the reactions to these policies should come. Either the economic growth drives the prices up or the short-term effects of resource re-allocation has lost or expended over time. Interest rates might go up depending on how governments want to act. Those affected by the previous recession will then feel the stress and may shrink their outputs again (however, this is also a simple line of thought as government should also be available for these businesses). When the prices pick up the momentum, I feel the same would apply to the housing sector. Recent gains in stock markets should bring greater long term benefits if they are transferred to housing markets (where there are great bargains). This would help to raise prices further. The need for raw building materials might not be that great as new housing doesn’t look convincingly cheaper than the existing ones.

Raw materials might be used for the infrastructure building programs and if they are imported, it would help the Baltic Dry Index. As for finished product exports or imports, the currency plays an important part.

Thus, if things are looking good, why would I still think that there will a dive in the market after this? My instincts just tell me that things are not really the way the indicators are telling (i.e. I stress again earlier). Just like a person who went on dieting and had some results on slimming down. You can’t really expect the guy to get fat again immediately by stuffing him all the food. It takes time. Now, it’s like the body has adjusted to lower volume of food and it may fail to function well if there is a surge in the intake. It’s just the organic part of the policy implementation.

The economy has contracted much in this 1 year and it seems like, in the modern trends, things will come and go in quick succession. Imagine the current DJIA, who will think of it reaching this point a few months ago. The momentum may keep going till the nature takes its course. The artificial demand created by the government stimuli shall be met by the actual supply. And when this demand vanishes, the supply needs to be shifted to the right equilibrium again.

I hope the economy will continue to grow but I would love to see it going through another round of correction. It will be better for those wounded in this round. Otherwise, there will be no mercy for them. Bigger gaps will be created and faster pace will be set from here. It’s still pretty much in God’s hands, I reckon.