Economy-market disconnect
The Economic Times, Editorial, May 13, 2009, Page 14
Hope Triumphs Over Experience
ON A day when the sensex vaulted 475 points, industrial production data showed a shocking 2.3% decline in March. For two months the world economy has performed dismally, yet stock markets have shot up 40-50% across continents. This glaring disconnect requires a cogent explanation. The standard explanation is that confidence is surging globally as the economy is bottoming out, and will soon rise. History shows that markets start rising four to eight months before the real economy does. However, history also shows that many market rallies during a long recession are temporary, and soon reversed. Four of the biggest bull runs occurred in 1929-33, in the depth of the Great Depression, as investors kept betting on a new bull market that did not come. Optimism can be self-fulfilling: if enough people think the worst is over and so start spending and lending on a big scale, the recession will indeed end. But the International Monetary Fund, not usually a market bear, projects that the current Great Recession will continue till 2011. The IMF projects a fall in world GDP for the first time ever in 2009, followed by an increase of 1.9% in 2010 — and any global increase less than 2% constitutes a global recession. So, even if the real economy has indeed bottomed, no V-shaped recovery may follow. The recovery may be weak, halting and lengthy. The IMF estimates that Indian GDP in 2009-10 will grow by only 4.8%, down from an estimated 6.5% in 2008-09.
The markets have caught fire as the latest news suggests economies are no longer falling off a cliff, and that free fall is being followed by gentler decline. Yet even gentler decline is recessionary. The latest US data suggest credit card losses could hit $82-181 billion by late 2010. Commercial real estate is crashing. And corporate bond defaults are spreading. India is better off than the US, yet dismal industrial data suggest Indian banks could soon face rising defaults. The economy-market disconnect must end soon. Either the real economy will look up, or else markets will fall again. We can hope for the best, but should prepare for the worst.
The Economic Times, Editorial, May 13, 2009, Page 14
Hope Triumphs Over Experience
ON A day when the sensex vaulted 475 points, industrial production data showed a shocking 2.3% decline in March. For two months the world economy has performed dismally, yet stock markets have shot up 40-50% across continents. This glaring disconnect requires a cogent explanation. The standard explanation is that confidence is surging globally as the economy is bottoming out, and will soon rise. History shows that markets start rising four to eight months before the real economy does. However, history also shows that many market rallies during a long recession are temporary, and soon reversed. Four of the biggest bull runs occurred in 1929-33, in the depth of the Great Depression, as investors kept betting on a new bull market that did not come. Optimism can be self-fulfilling: if enough people think the worst is over and so start spending and lending on a big scale, the recession will indeed end. But the International Monetary Fund, not usually a market bear, projects that the current Great Recession will continue till 2011. The IMF projects a fall in world GDP for the first time ever in 2009, followed by an increase of 1.9% in 2010 — and any global increase less than 2% constitutes a global recession. So, even if the real economy has indeed bottomed, no V-shaped recovery may follow. The recovery may be weak, halting and lengthy. The IMF estimates that Indian GDP in 2009-10 will grow by only 4.8%, down from an estimated 6.5% in 2008-09.
The markets have caught fire as the latest news suggests economies are no longer falling off a cliff, and that free fall is being followed by gentler decline. Yet even gentler decline is recessionary. The latest US data suggest credit card losses could hit $82-181 billion by late 2010. Commercial real estate is crashing. And corporate bond defaults are spreading. India is better off than the US, yet dismal industrial data suggest Indian banks could soon face rising defaults. The economy-market disconnect must end soon. Either the real economy will look up, or else markets will fall again. We can hope for the best, but should prepare for the worst.
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