Posted At : May 18, 2009 10:32 AM
Managing money and portfolio planning has particularly challenging. Traditional asset management techniques just simply may not work. Buy and hope strategies have spectacularly failed. Part of the reason we are so challenged is that we are experiencing a deleveraging on a scale in the world that is absolutely breath-taking in its scope. And to balance that, governments are going to have to issue massive amounts of sovereign debt to deal with their deficits. But who will buy it, and at what price? And in which currency?
It certainly appears as if the credit crisis is over or, at the very least, the light which most of us think we can see at the end of the tunnel is no longer that of an oncoming asteroid hurtling towards earth. No wonder equities are currently enjoying one of their best spells ever. And while equities continue to go up and up, most of us are left scratching our heads. Is this the real thing or will it go down in history as ‘just’ another bear market rally? Not so long ago, the entire financial system stared Armageddon in the face. Now, only a few months later, equity markets behave as if all the worries of yesterday have been washed away. How is that possible? Of course US banks made good money in Q1. The environment created for them by the government bailouts is the equivalent of the US government reducing the cost of goods to zero for our embattled car manufacturers and then going on to buy – courtesy of the US tax payer – a couple of million cars that nobody really needs. Even Detroit would make money given those conditions!
Is the recession over or even almost? Let’s get real. Recessions that come as a result of or in conjunction with a financial crisis take a lot longer to recover from. A recent study looked at 122 recessions, of which 15 were associated with financial crises. The research, published as Chapter 3 in the April 2009 World Economic Outlook (WEO) of the International Monetary Fund, finds that recessions that are either associated with financial crises or that are highly synchronized worldwide have historically been longer and deeper, and featured weak recoveries. The combination of these two features — a rare phenomenon in the postwar period — resulted in even costlier recessions, which lasted almost two years. Think we’re through this bear market. Take a look:DJ historical Trends
“In addition to the current global recessionary cycle, there were three other episodes of highly synchronized recessions: 1975, 1980, and 1992. These recessions were on average longer and deeper. Distinct from other episodes, the recoveries from these recessions feature much weaker export growth, especially if the United States is also in recession. “A perfect storm”? Recessions that are associated with both financial crises and global downturns have been unusually severe and long lasting. Since 1960, there have been only six recessions out of the 122 in the sample that fit this description: Finland (1990), France (1992), Germany (1980), Greece (1992), Italy (1992), and Sweden (1990). On average, these recessions lasted some two years, were unusually severe, and featured weaker-than-average recoveries.” (IMF) In addition, as I discuss above, the current recession is unlike any in the study, in that the habits of the American consumer are changing right before our eyes. Instead of spending and borrowing with little or no savings, people are now reducing their borrowing and increasing their savings. Savings are likely to rise to 7-8% or more in the next few years, as consumers see the need to repair their balance sheets and retirement funds.
Regards – Keith Springer