It was my pleasure to sit down with Endgame author John Mauldin recently. I first met John on the US speaking circuit in 2008. I have read all of his books and enjoy his weekly e-letters. I like his thinking. Like myself he is a longer-term optimist that new technologies, innovations and ideas will bring the world to a better future eventually. In the meantime of course one has to be very mindful of present economic risks and likely outcomes. Blind faith is not a reasonable option. Practical, careful thinking and active risk management are key to getting through present conditions in tact.
Following up on our discussion on the continuing credit crisis and recent developments in Europe is John’s e-letter this weekend “Preparing for a Credit Crisis”, –well worth the read.
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I’ve read Mr. Mauldin for years. I don’t always agree – just as I don’t always agree with Ms. Parks – but I’ve never learned anything from anyone who agreed with me.
Brace yourself for a recession.
Central banks around the world seem to be doing so, making little effort to prevent it this time around, resigned to letting the business cycle play out.
Stock markets around the world also seem to be doing so. In anticipation of economic slowdowns that won’t slide all the way into recessions, stock markets normally decline only into corrections (declines of less than 20%). But they plunge into bear markets when recessions loom.
And global stock markets outside of the U.S. are already in full-fledged bear markets. That includes 10 of the world’s 12 largest economies, the exceptions being only the U.S. and Canada.
In order of the size of their economies, at the recent August lows the stock market in China, the world’s second largest economy, was down 23% from its November peak, Japan down 21%, Germany down 30%, France down 29%, the United Kingdom down 21%, Brazil down 33%, Italy down 39%, India down 25%, Russia down 28%, and Spain down 29%. The exceptions were the U.S. and Canada, which at their August lows were down only 16% (the Dow) and 18% respectively.
But the recession and bear market are coming to the U.S. too, and may have already arrived.
You can be sure of that because it’s been one world economically for years, and historically global economies and stock markets tended to always move in and out of recessions and bear markets together even before their dependence on each other became so pronounced.
You can be sure of it because central banks seem willing to let it play out this time as in days of old, without intervention.
In the financial crisis of 2007-2008, it took a massive coordinated effort by global central banks to pull the world back from the brink of what would have been a total global financial collapse.
But when their economies began to slow again in 2010, without the world being on the brink of financial Armageddon, major nations outside of the U.S. were content to let the business cycle play out normally, arguing against the U.S. Fed’s decision to jump in with its QE2 stimulus efforts.
Indeed, while the Fed was making that massive monetary easing effort, central banks in Asia, Europe, and South America were tightening monetary policies and raising interest rates to ward off rising inflation, and to tackle the government debt crises created by their 2008-2009 bailout efforts.
The Fed’s QE2 effort pushed a flood of additional dollars into the global financial system, spiking the prices of commodities and paper assets like stocks, but had no lasting effect on even the U.S. economy.
This year, as global economies again slow significantly, central banks outside of the U.S. again seem content, or at least resigned, to letting the business and economic cycle play out, even though it likely means a global recession.
They refrain from saying anything too negative that might make matters worse, but for instance, this week the central bank of Brazil, which actually has one of the world’s strongest and fastest growing economies (but highest rate of inflation), warned that this downturn in global economies will not be as severe as in 2008-2009, but will be more prolonged.
The Financial Times reported Friday that “As the Organization for Economic Cooperation and Development’s forecasts showed on Thursday, the near-term economic outlook for the Group of Seven is dire, yet the mood is one of resignation. . . . Finance ministers across the G7 are searching for ways to explain their lack of likely coordinated action.”
And even in the U.S., the Federal Reserve has been clearly transparent about its reluctance to intervene this time.
With the economy far weaker than it was when the Fed intervened with QE2 last year, Fed Chairman Bernanke continues to say the Fed has some tools it can use if necessary, but will wait and see. In his most recent speeches he cautioned that the Fed is limited in what it can do anyway, and called for Congress to step up to the plate.
Thursday evening, President Obama did call for Congress to step up to the plate and pass his $450 billion jobs bill.
But even if the proposal should get through the political grinder of the grid-locked Congress, it would be too little too late by the time it could be implemented.
So prepare for a recession and bear market.
Hopefully investors learned from the 2000-2002 and 2007-2009 bear markets that Wall Street’s advice to diversify into ‘defensive’ stocks won’t do it. The so-called defensive stocks, defensive because they pay high dividends or have been around a long time, are dragged down just as far as any in a bear market.
Back in ‘the old days’ the call of successful investors in times like this was that “cash is king”. Even receiving little to no interest income on cash was better than experiencing a 30 to 40% loss.
These days investors are better served. The availability of ‘inverse’ mutual funds and ‘inverse’ exchanged-traded funds, designed to move up when markets move down, make them the new king in bear markets. Cash may be better than losses, but the opportunities for 30% profits while others are experiencing 30% losses are even better.
Great interview. “Endgame” is an excellent book for anyone who likes to know what had happened and possibly what might happen in the next few year. So little we know and so much to learn. Thanks again, Ms Park. JW, Vancouver
Mr. Balazs comment is an exact copy of one of Sy Hardings blog texts (September 9th; http://www.streetsmartreport.com). Please, make proper reference to the original author of those words and do not try to make them look yours…