August 30, 2010
Stock markets continue to struggle, looking deathly ill one day and then rallying the next. Volatility and synchronicity across markets and sectors are extreme. It’s investment anarchy, and gloom-and-doom about the future pervades as the chattering classes compete for the darkest sackcloth and ashes. Meanwhile high-grade bonds reach for the sky.
Everyone now knows the U.S. and global economies are in a soft patch; the issue is whether we are going into the dread double dip. Double dip means at least a couple of quarters of negative real GDP growth with whiffs of deflation and, of course, major downward revisions of corporate earnings and financial accidents. With the Authorities having expended both their fiscal and monetary ammunition, the sophisticates predict political paralysis, disillusionment, and Japanese-style slump-deflation. The more pessimistic envision frightening social consequences and a collapse of the already fragile fabric of confidence in the Western democracies. China, India, and the developing economies will be staggered, they say, and their equity markets are over-valued, so they are not safe havens. In the short run, the bears’ asset stocks are oblivious to the impending downturn, the loss of corporate pricing power, and the bursting of the China growth bubble. At the same time technicals are deteriorating, U.S. dollar strength will be a headwind for Asian equities, and seasonality is poor.
William Butler ...