Navigating the scary months of September and October could be just another test of our nerves, and those of our clients. There seems to be a small group of doubting Thomases who want to rain on the bulls’ or optimists’ parade. Robert Prechter, the former Merrill Lynch operative and author of the Elliot Wave Principle, has been tipping another big down leg that will take us past the March lows. I think he is wrong and so do the likes of Shane Oliver from AMP and even many bears, who see a sell-off, but not past the March lows.
Then of course there are the double dip merchants, who think eventually all of the window dressing, stimulus packages and rate cuts will run out of puff and the global economy will be becalmed. This could happen and could justify a sell-off, but not to levels that came out of the post-Lehman collapse, when credit markets were frozen and most governments around the world, except ours, China’s and Russia’s, were acting like economic nincompoops! I subscribe to something that the doyen of economics commentators, Max Walsh, once taught me; and that is, economies generally muddle through most crises. That’s what I expect. But what are the experts prognosticating on the shape of the recovery? The out-and-out optimists go for the V-shaped. The cautious optimists say U-shaped. The doubters go for W-shaped, and some outside-the-square thinkers are going for square-root recovery!
I have to say, one of the scariest things about being a commentator in the Internet age is that people can see your big, bad and wrong calls. Happily I don’t think I’ve got much out there that I am worried about, but I felt for poor old billionaire George Soros recently. Being an avid watcher of US business TV, I had come across a commentator who had brought up the square root recovery idea, but I had a nagging memory of a link between the mathematical sign and Soros. So, it was off to the search engine and the story was revealed. Back in April, Soros was talking about an inverted square root recovery! He thought the US economy was heading for a “lasting slowdown” – Japanese-style with low growth and inflation. In contrast, the square-root recovery would be down, and we’ve been there, and then up, which we’re into now, and then sideways.
The European team at Merrill Lynch wrote a paper called Alphabet Soup which looked at the different letter-recovery options. They made this observation, noted by the Financial Times website: “As long as world financial markets do not suffer a second heart attack, a full “W” looks unlikely. The recovery will have some momentum.” The Eurozone, the Merrill team say, could fit the square root call pretty well. As the recession has pushed so many sectors to low production levels, it is easy to see a biggish bounce back, but the impact of the recession and the market meltdown will hold back a lot of economic enthusiasm of producers, employers, consumers and even investors. We have de-boomed ourselves in effect and that’s why a sideways period is believable. Before signing off, let me remind you that calling an economy is easier said than done.
Let’s revisit what George Soros predicted in April. “I don’t expect the US economy to recover in the third or fourth quarter so I think we are in for a pretty lasting slowdown,” Soros said, adding that in 2010 there might be “something” in terms of US growth. This view was at odds with the consensus of US economists who tipped a 2009 second-half recovery back in November. I know this as I reported on it, and a few media and economist colleagues scoffed at it. Soros told Reuters that the recovery will look like an inverted square root sign. “You hit bottom and you automatically rebound some, but then you don’t come out of it in a V-shape recovery or anything like that. You settle down – step down.”
Recently Leon Cooperman, chairman and CEO of Omega Advisors, told CNBC that he thought the recovery from this point onward will be “square root-shaped”. “It’s the result of deleveraging – the consumers have to lift their savings rate, corporations have to improve their balance sheets, and government has to get the house in order,” Cooperman told CNBC. I think there is more upside, but there could be some sideways movements like in the early 1970s. So that might mean we’re in for a square-root-sign recovery. Personally, I think the sideways section will still point, but at a much more gentle slope to reflect that global trend growth could be positive but below the usual trend rate. If you are not prepared to take my word on this subject from my position as an economist then take it from me as a journalist!