There can’t be a triple-dip recession if we haven’t even had a single-dip recession; but if there is, says Ron Bewley, you read it here first.
At the beginning of this year, the term “double dip” had almost left our lexicon. But now it is back in spades. Investors are worried, and those sidelines are brimming with cash.
I show the harsh reality of the US recession (recall that we haven’t even had one dip) in Chart 1, from the 2007 November peak to the most recent (at the time of writing) May figure.
US GDP fell 4.1 per cent to the low of May 2009, but has climbed back 3 per cent since. There’s only 1.3 per cent to go to get back to the top, but it would only take one negative quarter – not a return to the depths of last year – to have a double dip. Not good, but the media hype paints it as the end of the world.
It is important to understand the psychology of forecasting to really understand how we got so excited about dip counting. In the academic literature there is the concept of “rational cheating” in forecasting: it often pays the forecaster to not reveal his or her true expectations. For example, if every other forecaster predicts the market will end the year in a range of 4800 points to 5000 points, and you think it will be 6000, there is little to be gained by telling your version of the truth. State your forecast to be, say, 5200, and you still get all the upside. If you are wrong, you are not too far from the pack.
Of course the “herding instinct” of forecasters has already put the forecasts in too narrow a range, given market volatility.
So now to dip counting. No one I listen to is actually saying there will be a double dip – just that there is an increased chance of one. And every forecaster I know puts that probability at well less than 50 per cent. So “for free”, every forecaster can throw in some probability of there being a double dip without ever risking being found out!
There either will be a double dip or there won’t. With only one outcome, we can all say,“I told you so”, because we have covered both bases. Only with repeat forecasts can such a probability be assessed as being accurate. My question is:
How many forecasters have thrown in a double dip just so they can’t be wrong? Of course no one should assign a zero probability to a possible event, but why all the smoke and mirrors?
There seems little doubt that theUShasalongwaytogotoget out of its economic mess. It will be tough. But it doesn’t matter if we get one tiny negative quarter growth or a tiny positive one. There is no (very) good news likely to come from the US anytime soon and that has been priced in.
Australia is not as dependent on the States anymore. Even their president keeps cancelling trips here. China is the bigger game in town, and they look great. Some say China is slowing down, but the world asked them to do that at the start of 2008 – 10 per cent to 12 per cent growth was not sustainable; 8 per cent should be the target! When we get what we asked for, the double dippers cry: “It’s a slowdown!”
Australian investors should always be ready for the unexpected, and that is called risk management. Always basing decisions on the outside chance doesn’t help investment performance. Interestingly, my interpretation of broker forecasts has the market producing an average of only 11 per cent total return for the 12 months ahead – down 2 per cent or 3 per cent over the August reporting season. To me that means expectations have been sharply revised down because of double dip fears. And when the fears abate, companies will find it easier to beat expectations and the market can jump up.
So why a triple-dip forecast? The main aim of most forecasters is to be noticed! Without a double dip there can’t be a triple – but if there is, I can claim to be the first to have predicted it.
Ron Bewley is executive director of Woodhall Investment Research – www.woodhall.com.au
