Today's Market Observation  10.29.2009  Mon  Tue  Wed  Thu  Fri  Park Archive

High Hopes for Greener Pastures

BY DANIELLE PARK | october 29, 2009

Over the past few years, I have referenced a recurring theme in economic history: high hopes that someone, somewhere, will be able to decouple from this global downturn and save the day for global growth.

This is very common human thinking; wishful thinking so to speak. Galbraith wrote often about the wide-spread belief leading up to the 30’s that somewhere there were big men who could put markets up and step in to save them from correcting. Eventually over the 20 year secular bear in stocks from 1920-1940, and the Great Depression, it became painfully clear that such high hopes were without foundation.

Since the bear market started in October 2007, we can recall a multitude of rallies when large investors were seen “stepping in” to buy financial assets. Prices would initially cheer on the welcome news of deep pockets deploying cash: Sovereign funds, Hedge Funds, foreign governments, Warren Buffett--all were welcome; and yet, markets broke down again, leg after leg.

Over the past 2 years, many have expressed great hope that emerging markets can lead the world back to steady growth despite a deep recession in most parts of the developed world.

In a similar theme, many Americans have cheered themselves up with great optimism for Canada. Americans acknowledge that their own economy is in shreds but they look to the Great North to buck the trend thanks to our commodity-based currency and more conservative banks (although lately our banks have been scooping up US investment bankers by the dozens, apparently we want to learn their tricks!) If only our grass could be greener.

The trouble is that America is Canada’s main customer. Without their relentless demand, a large part of our high hopes and bulging capacity are left withering on the vine. Witness the Bank of Canada’s announcement last week that recent Canadian dollar strength is enough to undermine all of our government’s stimulus efforts since June. It seems government coffers are being evaporated in vain.

Ask any imbalanced relationship, co-dependency is a vulnerable state for both sides.

There is no doubt that China’s mammoth stimulus spending has propped up their GDP numbers year to date. And if we could just take those numbers at face value perhaps some high hopes could there be had. But while the rest of the world celebrates Asian population as sufficient grounds for firming demand, it is worthy to note that Asia itself is holding out its high hopes for us: the imminent rebound of the western consumer.

On top of hope for resurging and debt-defying western consumption, there is another familiar fable prevalent in China these days: a naive belief that the Chinese government can prevent over-inflated asset prices from going down. 

It seems that we are all waiting on a miracle these days. The reality is we are all on life support together and a lasting economic recovery is likely to be slow and largely synchronous.

Meanwhile, speculation has officially gone free-money-mad in the world. Liquidity-dumps from governments have pooled into a multitude of bubbles as desperate players clamour to roll the dice. Chinese analyst Andy Xie wrote this week: 

"This round of monetary growth has mainly fed speculation, not credit demand for consumption or investment. Speculation has reached a dangerous point with the oil price threatening to reach triple digits again. Its implications for inflation may spook the central banks to raise interest rates quickly and trigger another crash. The excess money supply has created a new liquidity bubble... 

The case for a double dip in 2010 is already strong. Inventory restocking and fiscal stimulus are behind the current economic recovery. The odds are quite low that western consumption will pick up when the recovery runs out of steam next year. High unemployment will keep incomes too weak to support spending.”  link

This is the commodity wreck dawning again. Reckless, intoxicated players have once more made world markets a dangerous place for true investment capital. When the roads are crowded with drunks it is generally best to take ourselves out of harm’s way and let them crash into each other for a while.

Danielle Park

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Danielle Park Portfolio Manager, Venable Park Investment Counsel Inc.
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