Over the past few years, I have referenced a recurring theme in economic history: high hopes that someone, somewhere, will be able to decouple from this recession and save the day for global growth.
This is very common human thinking; wishful thinking so to speak. Galbraith wrote often about the wide-spread belief leading up to the 30’s that somewhere there were big men who could put markets up and step in to save them from correcting. Eventually over the 20 year secular bear in stocks from 1920-1940, and the Great depression, it became painfully clear that such high hopes were without foundation.
Since the bear market started in October 2007, we can recall a multitude of rallies when large investors were seen “stepping in” to buy financial assets. Prices would initially cheer on the welcome news of deep pockets deploying cash: Sovereign funds, Hedge Funds, foreign governments, Warren Buffett– all were welcome; and yet, markets broke down again, leg after leg.
Over the past 2 years, many have expressed great hope that emerging markets can lead the world back to steady growth despite a deep recession in most parts of the developed world. In a similar theme, many Americans have cheered themselves up with great optimism for Canada. Americans acknowledge that their own economy is in shreds but they look to the Great North to buck the trend thanks to our commodity-based currency and more conservative banks (although lately our banks have been scooping up US investment bankers by the dozens, apparently we want to learn their tricks!) If only our grass could be greener.
The trouble is that America is Canada’s main customer. Without their relentless demand, a large part of our high hopes and bulging capacity are left withering on the vine. Witness the BOC’s announcement this morning that recent Canadian dollar strength is enough to undermine all of our valiant efforts at recovery to date.
Ask any imbalanced relationship, co-dependency is a vulnerable state for both sides.
There is no doubt that China’s mammoth stimulus spending has propped up their GDP numbers year to date. And if we could just take those numbers at face value perhaps some high hopes could there be had. But while the rest of the world celebrates Asian population as sufficient grounds for firming demand, it is worthy to note that Asia itself is holding out its high hopes for us: the imminent rebound of the western consumer. It seems that we are all waiting on a miracle solution to weak world demand, when the reality is we are all now on life support together.
This recent interview with Stephen Roach from Morgan Stanley Asia reminds us that export-dependent China is suffering western-demand withdrawal symptoms along with the rest of us:
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