The world economy looks in a bad way.
It had already weakened in the second quarter, thanks to higher oil prices and the Fukushima accident in Japan. Then political infighting over raising the US debt ceiling battered confidence. Now increasing numbers of investors expect a recession imminently.
But the economy is not as weak as the data suggests. In fact, in the coming months I expect the economic news to get a lot better.
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How do I know? Because you can already see the signs if you know where to look.
The bad news is, this is just a temporary reprieve before the real carnage hits in 2012.
The good news - US companies are due a spending spree
Why do I think the economy could pick up soon?
After last November's mid-term elections, US politicians passed a law to allow companies to offset against tax 100% of investment spending in 2011. (Property investments are excluded.)
Now US companies have only a few months left to take advantage of these valuable incentives. If they wait until 2012, they can offset only 50% in the first year and must defer the rest over the life of the asset.
So US companies have a huge incentive to bring forward all of their planned 2012 investment spending into the second half of this year. If you do the sums, companies should bring forward short-life assets like office equipment by six months. They should bring long-life assets like machinery forward by 12 months.
Non-property investment spending is 7% of US GDP. If 7% is crammed into the second half of 2011, GDP would be boosted by 3.5% in both Q3 and Q4. GDP could hit 5%. We might even get some job growth.
Now, I talk to a lot of investors and stock market analysts. And I can tell you almost no one is talking about this. Yet it is starting to show up in company results.
Capital goods companies have been reporting strong results. That includes technology companies such as IBM, SAP and Oracle, engineering companies such as GE and Honeywell, and suppliers to the energy industry such as Honeywell and Schlumberger. Meanwhile Airbus and Boeing are announcing record new orders. And even small office furniture companies are doing well.
Order books are rising even faster than revenues. And the trend will accelerate into the end of the year. Yet no-one attributes this to the tax incentives.
So when the effects become visible, markets will celebrate the arrival of what they'll believe is the long-awaited recovery. Stocks will rise, embarrassing the bulls that sold out now. Meanwhile, bears will get sucked in to avoid being left behind. The rally could be quite a big one.
The bad news this is a temporary boost
Here's the problem: this won't be a genuine or sustainable recovery. Quite the opposite. In fact, the better the news between now and the end of the year, the more worried you should be.
If 7% of 2012 GDP is brought forward into 2011, it only makes sense that there must be a severe recession in 2012. You can't yank that level of growth from the future and not expect to have to pay for it later. Company profits will be hit hard. And stocks will slump.
Will it be the beginning of the next big bear market? It could well be.
But it might take a while before investors realise what's hit them. That's because profits could keep rising well into 2012 as companies fill the orders placed in 2011.
By late 2011, companies will start to see that customers aren't placing any orders for 2012. However, this won't show up in the figures until the Q1 2012 reporting season next April.
And even then, you'll only see it on the balance sheets. It might not show up in profits until even later.
So when will companies report it? And when will investors notice?
Timing the market consistently is impossible. That's why I've already told subscribers to my True Value newsletter to reduce their exposure to stocks (it's currently closed to new subscribers but if you are interested in finding out more please email truevalue@moneyweek.com with 'waiting list' in the subject line and we'll contact you as soon as it reopens). But I think there will be further rallies to sell on later this year.
In any case, whatever happens, be ready for carnage in 2012. I believe that once-in-a-generation opportunities that are coming. Make sure you have the free cash in your portfolio to take advantage of them.
P.S. My colleagues at The Fleet Street Letter are releasing a special report later this week in it they investigate how bad things could get for UK investors over the next 12 months. Importantly, they've uncovered four simple ways you can respond.
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Simon Caufield's True Value is a regulated product issued by MoneyWeek Ltd.
The Fleet Street Letter is a regulated product issued by MoneyWeek Ltd.
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