US stocks rally, where next for the Greater Recession
Posted on 11 March 2009 with no comments from readersYesterday the Dow rallied by 5.8 per cent, its best rally this year and a welcome relief from the 21 per cent slump in stock prices since the inauguration of President Obama.
But at the same time the IMF has just announced that the world is now in the Greater Recession with global output set to decline this year, the worst economic performance in living memory. Does that justify a stock market rally?
Obviously not, but as Dr Marc Faber argues in the TV interview posted on this blog yesterday, markets had fallen too far, too fast and a rally was overdue. So the rally is best seen as a technical bounce from an oversold position. It can hardly be a turning point.
Global trade slumps
For a major turning point in a stock market trend there has to be a big reason. It used to be that a change in interest rates would often do the trick but that has completely failed to prevent global trade falling off the edge of a cliff in recent months, or for that matter stock market declines.
The figures speak for themselves: a 35 per cent collapse in exports from Singapore in February, a 46 per cent slump in exports from Japan; worldwide air cargo traffic down almost a quarter.
This contraction of global trade is linked to the financial crisis of last autumn as the trade finance for new orders has dried up along with consumer demand. The IMF is right to call this the Greater Recession because this is a clear repeat of the collapse of global trade last seen in the Great Depression of the 1930s.
What then will follow? We can read it all in JK Galbraith’s history of the Great Depression. There will be competitive devaluations and a rise in protectionism if this history is a guide.
Political challenge
The challenge for the leaders of the world is to avoid a repeat of the Second World War that came as a consequence of the Great Depression. But from an economic standpoint there is a downward spiral in place and markets will have to find a true bottom, and short term rallies in stock markets are not to be trusted.
We are all of us going to have plenty of time to re-read histories of the Great Depression before it is time to invest again. Those who rush in now will simply lose their shirts in the next down phase.
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From the Daily Telegraph today; it looks like gold and oil will prove the best investments like in the 70s. That is going to be great news for the Middle East, when it happens – but we all have to live in the present:
Oil and other commodities which have collapsed will now begin to bottom out before rising exponentially once the economic recovery kicks in. Equities meanwhile will begin a long drawn out recovery process which will result in higher equity indices all over the world. The best performing shares will be found among the gold, oil and base metal producers.
Much of the above is starting to happen now. Gold is outperforming every asset on earth, long-term government bonds collapsed in January and index-linked gilts have been outperforming conventional gilts for the past three months.
Most equity markets are above their cycle lows set last October or November, despite the unremitting bad news, and seem remarkably resilient to the torrent of bad news that is currently unfolding.
Investors should listen to what the markets are saying about themselves rather than be overly reliant on what the economists are saying about the market. The message from the markets is clear and unambiguous: reflation, not deflation, will be the ultimate winner here.
How high can gold rise? Last July I suggested that $2,000 an ounce on a two to three-year view was possible, as this would bring gold back up to its historical peak in real terms (constant dollars) last seen in 1980.
This could now turn out to be a substantial underestimate as the stage is now set for gold to rise to $3,000 an ounce or higher as a wave of freshly printed liquidity sparks a renewed global surge into the only asset that investors will trust in these circumstances.
If investors worldwide choose to switch 1pc of their portfolios into gold, the central banks will not have enough supply to meet that demand. Gold from mining has struggled to meet even jewellery demand for the past few years, never mind demand from investors.
At Charteris we have implemented this strategy for the funds and clients that we look after. Our gilt fund, the City Financial Fund, which according to Lipper has been the number one gilt fund in the UK since launch, is heavily weighted towards index-linked gilts.
We are going up big time..