This week the International Monetary Fund (IMF) released its economoc outlook report for October 2008. Some lowlights:
• World growth will slow amid most dangerous financial shock since 1930s.
• The advanced economies grew at a collective annualized rate of only 1 percent from the fourth quarter of 2007 through the second quarter of 2008.
• No growth in many advanced economies until at least mid-2009.
• Emerging and developing economies have not decoupled from this downturn.
• After 5% global growth in 2007 the IMF now predicts 3.9 percent in 2008 and 3.0 percent in 2009, with a modest recovery expected to start in the later half
of 2009. -Global growth is not expected to return to trend until 2010.
They also cite significant downside risk to present forecasts:
• Persistent financial stress and the credit constraints from deleveraging, which could be deeper and more protracted than in the baseline scenario.
• Further U.S. housing market deterioration, which could be deeper than forecast.
• European housing markets could weaken more broadly than envisaged in the baseline.
• Potential disruptions to capital flows to emerging economies and the risks of rising protectionism represent additional risks.
Meanwhile TD Economics released its Quarterly Economic Forecast today, which now adopts their previously most pessimistic scenario as their base case going forward. Key points:
• World economy expected to expand by a meagre 0.5% in 2009. We are witnessing a rare instance in history of a synchronized global recession.
• The U.S. recession is one-year in progress and the hardest leg of the downturn has just begun.
• Canadian economy is likely to contract until mid-2009.
• Tumbling commodity prices will have a unique impact on the real Canadian economy, contributing to an unprecedented 3.2% contraction in nominal GDP, which
is the equivalent of shaving $51 billion from domestic income.
“First, we project great weakness through the first half of 2009 across all major economies. Second, a solid recovery is expected in the second half of 2009 and through 2010. Third, the economic outlook can’t be seen through rose-colored glasses beyond 2010. A lot of imbalances will still need to be unwound, including those that afflicted the global economy before this crisis – such as the saving imbalances between countries. In many respects the situation will have become worse, due to recapitalization, deleveraging among businesses and households and huge public sector dissaving.”
These are the fundamental reasons why we have historically always had long secular bear markets after long secular bull markets. The leverage and over-spending of the secular bull have to be paid back and rebalanced during the secular bear period.
The good news is that in the not too distant future, as pessimism runs rampant, I suspect the stock markets of the world will start into their next cyclical expansion within this secular bear, and we will have an opportunity to ride the wave up again for a while. But the contraction after the next expansion will come hard and sharp, just as it did in 2000-2002 and 2008-2009, and defending our capital from losses will be the key throughout.
In these past few weeks of 2008, I am being asked to do many media interviews looking back on 2008 and the number one question asked is how did we at our firm know these bad economic conditions were coming and how did we know to protect our clients and their capital from this bear market. I wish I could say it was superior intelligence. It was not. Mostly it was just humble, diligent study of history, market cycles and human behaviour. Each cycle is slightly different, but human behaviour is remarkably consistent through time. The hubris and dumb-risk taking of the boom is the DNA that always breeds the bust.
It is crucial to have our eyes open and train ourselves to read the signs. It is also crucial to have a plan to protect our financial health from the fall-out. Those that say they see the signs but do nothing to protect capital are unfortunately of no value.
This recent article by Economist Joseph Stiglitz is refreshingly candid about how we got here today:
“Was there any single decision which, had it been reversed, would have changed the course of history? Every decision—including decisions not to do something, as many of our bad economic decisions have been—is a consequence of prior decisions, an interlinked web stretching from the distant past into the future.”
“The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. The embrace by America—and much of the rest of the world—of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.”
'Twas ever thus. This is not rocket science; not brilliance. It is simple human nature. The more complex the world seems, the more understanding of our behavour will cut through the noise. In the end, EQ or emotional intelligence trumps IQ every time.
Cory’s Chart Corner
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