We are not in a sustainable recovery. The burden of debt is still far too great, with much of the debt merely transferred to or underwritten by governments, says the well-known British fund manager Crispin Odey.
(I had the privilege of interviewing him years ago, and have never forgotten a key investment principle he offered, that it's unwise to invest in companies that depend on political favour of any kind for their success).
"A world economy in which rational consumers take to paying down their debts, as they are doing, will not allow a return to the inflated demand we knew," Odey argues. "There is more money around, but it is not being spent."
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Nevertheless, "this is a rational bull market in real assets, with room to run.
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"With money set to stay artificially cheap, with many governments facing commitments they cannot meet, and with taxes rising, it is rational that investors want assets whose value is a far as possible independent of governments.
"Equities buy a slice of a company's future earnings and current assets. Commodities buy something tangible and possibly scarce. Gold is portable wealth."
Odey believes we are "living a rational bubble." If you write it off, you miss the opportunities.
Trevor Greetham of Fidelity International says the flood of liquidity created over the past year "is heading into the emerging markets and into commodities." That is "not a recipe for single-digit returns and stability Fasten your seat belts."
He says that although central bankers can create liquidity, they cannot determine how it is used. Such liquidity tends to flow, not into the "damaged parts" of the global economy where policymakers would like it to go, but into the "areas that are still working."
Greetham is optimistic about a recovery in the world economy. He argues that the sheer scale of stimulus by governments and central banks almost guarantees a strong upswing. Companies have started to rebuild their inventories. "Re-tooling, re-hiring and stronger consumer spending cannot be far behind
"If inflation stays low, central banks will want to keep [interest] rates low and we could see several years of expansion. This seems the most likely outcome in view of the massive spare capacity in the world economy."
David Roche of the consultancy Independent Strategy says the defect in the argument that the world is on the path to recovery is "that none of the problems that caused the credit crisis have been resolved." Household and bank leverage is worse than before, the bad debt problem has not been dealt with, and we have a new level of profligacy and leverage this time, in government.
Edward Chancellor of fund managers GMO says it's misleading to expect a sharp recovery from last year's collapse because of historical precedents. He contrasts the 19th century with the current situation.
Then "depressions were left to burn themselves out. There was no fiscal nor monetary stimulus; unviable businesses went under; households were not succoured with rate cuts and wage incomes fell; excessive debt burdens were resolved through default rather than bailout. Deflation purged the economy like a forest fire, preparing the ground for a rapid recovery."
By contrast, "the aim of policy today is to mitigate the pain of the economic downturn by all available means. Government deficits prevent the recession turning into a depression. The Federal Reserve cuts rates to zero and expands its balance sheet, thereby arresting the debt deflation. Such actions reduce the immediate social costs of the financial crisis, but they do not resolve the problems left behind by the credit boom."
A recent study of past banking crises by the International Monetary Fund provides "no evidence to support the snapback recovery thesis" when trading partners are also in trouble (as now). Such crises tend to depress economic growth "substantially and persistently" and to be followed by "lengthy periods of high unemployment, weak investment and poor productivity growth."
So we are probably going to see an investment asset bubble fuelled by cheap credit while real economies employment, business activity, disposable incomes continue to suffer for years to come.
This article was written by Martin Spring in On Target, a private newsletter on investment and global strategy. Email Afrodyn@aol.com to be included on the recipient list.
