In retrospect and on first thought, it always feels good to be vindicated. But, as we think about the consequences, the cost of that vindication is quite sobering. Five years since the crisis started, we have deluded ourselves about a recovery. Our policy makers say it is round the next corner but we always seem to be waiting in the wrong corner. The reality is that the recovery is more like a mirage. As a student of history, a lot of what is happening has a eerie sense of Deja Vu (as we said in a previous post). Yet, the contemptuous ignorance of history that people have is shocking: the first question that I am often asked is 'as a history guy, what value can you add'? I give them a reply that was common in the 19th Century: 'Cicero once said that everything has a history so, history is everything'. Their poverty of intellect makes them miss the essential point - that I am insulting and belittling them by giving a 19th century reply in the 21st century.
The personal reflections end there.
We have been saying the same thing for a long time and it has become quite monotonous. So instead of reiterating the same thing over and over again which will do nothing but force our readers to lose interest, I thought it would be a good idea to present some interesting charts that I have complied from various sources (duly acknowledged) with a few insights. After all, charts often speak a different tale (as some of the charts we have produced in the past show).
Some years ago (in 2009 actually) the third post on this blog was a call to remember the history of -Japan accompanied by a chart. That chart was that of the Japanese equity markets since 1992. It was essentially to draw attention to a particular salient feature of the world economy that I pointed out for a long time - just like a broken record. Since we often forget history, I thought I would update it and start with that. I must confess that like many others, I too underestimated the crisis and thought of only the next three years (which will be over soon). I thought it would be a good idea to update the chart of Japan (below):
The world will be no different in the next many years, only the intensity of the up-moves and the down moves may increase rather than decrease. The world economy should consider itself lucky if there is no further deterioration and if we can simply chug along the bottom for a few more years till all the excess of the last 25 years are slowly overcome. Thus, we are likely to have many years of bad economic conditions that will be accompanied by sharp rallies in the markets - which will make us feel good and ... think that the recovery is just around the corner.
The process of recovery can be hastened if the big banks are broken up and there is rescheduling of debt that runs into tens of trillions dollars. Since these are unlikely to happen in a hurry, the recovery is unlikely to gain traction for the next few years. As we have reiterated so many times in the past, a semblance of normality (over the short-term and probably the medium term) is possible if we have a few more trillions of dollars pumped into the economy. But, there is never a free lunch, somewhere, at some point of time, the costs have to be tabulated and will be tabulated.
Japan is important for another reason: The impact of demographics on the economy. The chart below is an excellent illustration of what we can expect from those countries where the demographics are staked against them:
(Chart source - http://twitpic.com/photos/M_McDonough)
Who cares! Our proclivity to be carried away by what we would like the world to be is all pervading and quite dangerous. The following chart will probably give more credence to the view that the recovery is long way off.
The best places to invest for the next few decades: Africa!
But don't write off the west, all that they have to do is to open the floodgates for those who want to come in and within the next 10 years the picture will look different.
Indeed the world is looking a lot like Japan - as we had mentioned in July 2010. None of the questions about the global economy that we have been raising for long have any answers - even five years after the start of the crisis. At last, we are increasingly hearing voices that are willing to remind investors of the stark reality. Nothing much may change for the simple reason that none of the problems that got us into the trouble in 2007 have been solved, they have only been postponed. The policy makers should be given the credit for their ability to postpone things for so long.
Even five years after the beginning of the crisis, all the important indicators seem to indicate that we are nowhere near the end of the crisis.
The above chart of the Baltic Dry Index (sourced from Bloomberg), indicates that it will take years before the crisis comes to an end. The index is an excellent indicator or freight rates of dry commodities that make up the bulk of the movement of goods. Since 90% or more of the world trade is on the seaways, it is an important indicator. Importantly, the Index (along with various other shipping indicators) seems to be indicating that the process of reverse globalisation seems to be very much underway. That is probably the reason why the US Railroads have witnessed better days.
Our optimism that we may be recovering at last may be largely be misplaced. The chart below shows the traffic passing through the Suez Canal. Though it has recovered marginally, it does not indicate a trend that is likely to be different from the past three years - i.e. a sideways trend.
(Source: Bloomberg)
But, we are likely to be down for so long that the 'new normal' will be nothing different from the long process of readjustment that we have to come to grips with.
Sorry to douse all the enthusiasm about a possible recovery with gallons of ice-cold water. The recovery is far away as indicated by the chart below:
But, dont lose faith: look at our Japan chart at the beginning of the post and we should remember that nothing moves in a straight line, especially in the markets.
The line downwards can be quite unnerving as the chart below indicates the correlation between waste and GDP.
Personally, I am more inclined to bet on a deterioration in the next two quarters, especially in countries such as India and China. Indians are so enamoured by thinking about a bull market for the next 100 years that we have forgotten what it was like in 1996-98. Those are precisely the times when we will be woken up from our dreams and the reality will be quite stark. We were so convinced that we could sleep our way to 9% growth that we still dont believe that we could stumble back into the 'hindu rate of growth' - that is not very far from 5.5% GDP growth.
The India tumble-stumble story is too long to be covered in this post we will come back with another post.
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