THE “W” ECONOMIC RECOVERY - July 9, 2009

 
  
This is neither a reference to George W Bush nor a “w” for winning. Rather, it is the chart structure that is likely to reflect the advance and retreat (X2) of the global economic recovery over the next few years. I’m of the view that, unfortunately we are at best in the middle leg of this “W” recovery with a downward re-tracement now dominant before a sustainable progression upward.
 
WHAT HAPPENED TO THE "V RECOVERY"?
 

A few months earlier, I was of the view that the economic rebound globally would generally resemble a “V.” The current upward movement, particularly in oil and commodity prices has been even beyond my expectations of a dramatic bounce once bottom had been hit. The “reflation” investment strategy that has sparked the latest rush to commodities, including petroleum, is not only still premature and too excessive but is more likely to become the trend that stifles this economic recovery.
 
We have not yet even hit bottom, at least when it comes to unemployment and the condition of the average consumer is particularly difficult, especially in the United States. Housing is still trending lower, (and just recently Moody’s lowered ratings on a cross variety of “seasoned” jumbo mortgage backed securities issued between 2002 and 2004, under then more prevailing underwriting and valuation conditions, largely pre-bubble). There is consensus that unemployment will go higher, that credit card and other consumer defaults are likely to continue rising. Petroleum and gasoline prices have spiked upward again.
  
TOO MUCH OPTIMISM, OR PERHAPS SPECULATION
   

Certainly consumer sentiment in US has seen some improvement, in part driven by confidence in the new political leadership and perhaps more the expectation, rather than yet realized benefits, of the recent stimulus efforts. Barack Obama’s election has been a source of confidence for many Americans in the broader terms of the country’s promise; however the tangible economic results are still largely to come, hopefully.
 
Speculation though is way ahead. The US and global economy is likely to face a bout of heightened inflation as a result of the reflationary stimulus efforts from China and Japan to Europe and the US. However, the expectation, or rather the speculation is too far ahead of the reality. This expectation could still deliver the reality by sheer momentum; however it is my best guess and the shared fear of many that the rising commodities, particularly energy prices could snuff out the recovery by exhausting buying power and suffocating the early signs of consumer confidence and recovery. (Recent announcements that the US and perhaps EU may hold hearings on energy price “speculation” and ways to limit such has already had a deflating impact on petroleum and its refined products; however this regulatory step may have come too late to stem the tide that has turned upon itself and undermines economic recovery).
 
HOW MUCH OF ECONOMIC CRISIS FUELED BY ENERGY PRICE BUBBLE?
 

The housing crisis is a primary if not decisive contributor to the economic crisis and the recession that still continues. In fact, the recovery in housing, the most important factor in at least most Americans sense of economic well being, is still at best uncertain. The energy price bubble though both contributed to the building of a presumed housing bubble and also on its own undermined economic activity and consumer confidence.
 
The recent trend of rising commodity prices and still continuing lower housing, (and most other real estate values), has been contradictory. In fact, with housing values still dropping in many US markets, (30 of the 50 major US metropolitan housing markets are more likely, 75% more likely, to have lower valuations by beginning of 2011 then currently according to respected analysis), the rise in petroleum and refined products in US context is neither economically sound or sustainable.
 
WHAT NEXT?
  

The next 10-15 days will signal the depth of this capital markets correction downward. US and most global equity markets have already fallen around 10%, from highs just a couple of weeks earlier. Some analysts still contend that global financial markets, led by equities, will go below the bottom hit in the last part of 2008 and early 2009, (US markets hit lows in March 2009 while some other markets hit bottom a few months earlier).
 
It is my view though that this second “V” of the “W” will be less volatile and dramatic. The fear and uncertainty appears to have substantively waned which dominated the panicked sell-offs of late 2008 and early 2009. Nonetheless, nothing is excluded and the danger for a substantial sell-off beyond today’s levels still exists.
 
WHAT IS ENOUGH STIMULUS FOR A LASTING CURE?
 

A bit of stimulus can be like a shortened antibiotic treatment: it can initially appear to be working but when treatment is ceased prematurely a more resistant malaise becomes ever more resurgent. It is perhaps debatable as to whether it was better to resist economic stimulus versus the huge and potentially enormous deficit building budgets, as in US. However, once economic penicillin was decided upon to combat the crisis, there is no option but to continue until the malaise is decisively overcome.
 
I fear that shortsightedness will prevail in many capitals, and especially in the politically hypersensitive Obama Administration, and the remedial help will be curtailed prematurely, with malaise and stagflation ever more entrenched. Here are some considerations to try to distinguish between a false remedy and a sustainable cure:
-- Addressing hyper-speculation in real assets, particularly commodities such as petroleum and refined products.
-- Continued assistance to homeowners to curtail effects of what is now probably becoming undervalued market further hit by rising unemployment and inadequate sale/refinance options.
-- Continued stimulus initiatives versus stopping short on cure or failing to deliver such programs that will have more immediate impact on job creation and spending.

 

Mo Sacirbey