Erstellt am: 04.09.2009 Autor: Edward Roby Status: Senior
A recovery on credit
When it comes to sensational sprints, only Jamaican track star Usain Bolt managed to outclass the equity markets this summer. Whether those frisky stocks are also fit for the longer distances won’t be known until the massive government stimulus programs peter out. But a rash of insider selling already raises doubts.
In the depths of allegedly the worst economic slump since the Great Depression, spring and summer stock quotes just kept popping on both sides of the Atlantic. Germany’s blue-chip DAX index raced to a year’s high toward the end of August. The same rising trajectory that began with year’s lows in early March was also traced by the S&P 500 and Dow Jones Euro Stoxx 50. MSCI World Index staged its biggest spurt since 1970.
If that’s recession, some investors might root for an encore. The facile explanation for all this buoyancy was that market participants were placing their bets on an imminent worldwide economic recovery. So, faith and hope trump concrete sales and earnings data.
Sure enough, the low-volume equities rally was flanked by persistent official sightings of “green shoots” on the U.S. business landscape. In developing markets, the financial story emphasized surprising economic resilience in China, Brazil and India. Japan’s economy apparently lifted off its statistical derrière. And Europe’s most current batch of performance data suggested that at least France and Germany may be growing again.
Since all the good tidings coasted along on a plush magic carpet of public deficit spending, there was another way to look at the rally in stocks and parts of the credit market: Chalk it up to government intervention. “Reflating nominal GDP by inflating asset prices is the fundamental, yet infrequently acknowledged, goal of policymakers,” noted William H. Gross, the boss of Allianz-affiliated bond investor PIMCO, in his August investment comment.
The trillions deployed by government and central bank interventions the past couple of years had to show up somewhere. And the alternatives to equities have narrowed. The crisis sidelined competing bets like real estate and complex securitization products. A commodity derivatives bubble in oil and cereal grains popped more than a year ago. Some rescued asset classes – like many a big financial firm – remain on government life-support. The concerted flattening of official interest rates meanwhile flushed billions out of safe storage in money-market funds and banked savings. Gigantic public bond issues sopped up some liquidity. But spurned corporate junk bonds rebounded. And a liquidity boomlet for stocks was no surprise.
Yet precarious public deficits piling up from the great reflation binge must test the fiscal and monetary limits at some point. What happens to equities when the economic stimulus runs out then hinges on the vaunted economic recovery. Expert opinions diverge sharply, at least for the U.S. economic outlook. Goldman Sachs and Morgan Stanley have issued bullish forecasts for the growth of GDP, which contracted by only 1% in the second quarter after shrinking by 6.4% in the first. And President Obama proclaimed that “the worst may be behind us.”
Influential New York University economist Nouriel Roubini isn’t quite convinced. In a published essay on Aug. 23 he cited numerous reasons why any global recovery would have to be weak at best and why there’s “a big risk of a double-dip recession.” The director of $2 billion hedge fund Clarium Capital Management shared much the same bearish bias with a Bloomberg interviewer: “If we have a recovery at all, it isn’t sustainable. This is more likely a ski-jump recession, with short-term stimulus creating a bump that will ultimately lead to a more precipitous decline later.” So, was it a bear-market rally?
Well, private consumption accounts for 70% of U.S. GDP and it isn’t looking exactly robust. Understated by official data, unemployment is rising toward double digits while household incomes wither. May’s leap to 6.9% in the U.S. savings ratio probably means people are paying down mortgages, consumer loans and credit-card debt rather than shopping with abandon. Beyond the usual business inventory restocking at the tail-end of a protracted economic slump, it is hard to spot any of the fresh demand needed for the recovery in business investment and production.
The 2-year-old economic crash has exposed a dangerous hidden reef of excess capacity in the world economy. Layoffs of workers are normally part of the cure for that. The global automobile industry, for example, is sitting on capacity to build 25 million more cars than the market can absorb in a year. Tottering, undercapitalized banks with fanciful balance sheets will have to cope with rising loan defaults. Construction, shipping and parts of the retailing sector continue to suffer. The incipient upturn could prove too weak to sustain the levels of employment and capital stock that were the normal in the past.
This recovery could reset medium-term nominal GDP expansion at a “new normal” level well below the roughly 5% growth to which expectations in the real economy and financial markets have been geared for the last 15 years, Gross told PIMCO investors. Taking GDP expectation as a proxy for the available return on capital in the economy, permanent downsizing of U.S. output capacity and employment would be in store if a reduced level persists. “A 3% nominal GDP ‘new normal’ means lower profit growth, permanently higher unemployment, capped consumer spending growth rates and an increasing involvement of the government sector, which substantially changes the character of the American capitalistic model,” he wrote.
Professor Roubini worries that outsized fiscal deficits could eventually crowd out private spending. And he points out that the progressive reduction of global payments imbalances could lead to a weaker recovery for everyone. This would happen if domestic demand in China, Japan, Germany and various emerging economies with current account surpluses and excess savings cannot grow fast enough to make up for the falling demand in “profligate economies, such as the United States.”
China has responded to the global downturn by uncorking a domestic economic stimulus program worth around half a trillion dollars. “In general, the stimulus program should help boost infrastructure investment, including in the interior,” said Markus Jaeger, global risk analyst for Deutsche Bank research, in an e-mail exchange. “And if the government increases income support for the countryside, real incomes in the countryside, the increase in domestic demand and investment should help stimulate imports and reduce the trade surplus.” But he expressed doubt that there would be “a substantial change” in China’s external imbalance in the next year or two.
Nearly all other big economies have responded to the crisis with their own monetary and fiscal doping. Germany has doled out job subsidies for workers put on shortened shifts and grants for motorists who junked an old car to buy a new one. Now expired, the popular stimulus for car sales helped mass manufacturers, including foreign ones, but did little for the upscale makes that dominate the German industry. Apart from a fleeting market distortion, critics have questioned the wisdom of shoring up an export-dependent manufacturing industry that must now to shrink to fit the lower demand in the worldwide market.
Real German exports shipments are set to tumble this year for the first time since 1993. Machinery, chemicals, vehicles and electrical equipment are stuck in a rough patch. The world-champion capital goods exporter is uniquely exposed to the current contraction of worldwide merchandise trade on a scale unseen in more than six decades. World Bank pegs the global trade volume to fall by 11% this year, while OECD anticipates shrinkage of 13%.
A vigorous worldwide economic recovery would, of course, prime exports. China, Japan, Germany and the other net exporters might then be able to postpone the pain of adjusting excessive production capacity to the smaller reality of global demand. If world trade fails to rebound to pre-crisis levels, however, the surplus countries will have to rebalance industrial policy. These economies will have to find ways to derive a larger contribution to national growth from domestic demand.
That overdue change in strategy could now be dictated by the increasingly precarious finances of the economies that traditionally consume more than they produce. The crisis has disrupted the unbridled credit expansion that nurtured the international payments imbalances during the last couple of decades of globalization. A return to business as usual looks unlikely. The typical American consumer, unlike his government, has turned over a new leaf called austerity.
The massive U.S. rescue and reflation campaign has socialized the losses of the bloated financial sector. But it has mostly detoured around the real economy of goods and services that will eventually foot the bill. The essential mission of rebuilding the shrunken domestic manufacturing base has yet to begin. The crisis apparently hasn’t shaken a bedrock strategic belief in Washington. That’s the expectation that the country can continue to engorge foreign savings by racking up bigger and better trade deficits and still remain the issuer of the reserve currency in which the world’s key international commodities are priced.
A growing list of foreign governments has registered dismay about that unsustainable situation. So far, they haven’t been able to mount a concerted challenge. A U.S. relapse into recession could finally tip their hand.
