Finally, a rip-roaring bull case supporting the idea that the market will rocket higher from here.
As we noted last week, the current consensus is that the economy will soon start growing but that the recovery in 2010 will be feeble. (To brush up on this consensus, see the presentation below.)
This consensus is likely to be wrong–the consensus is usually wrong–but uber-bulls and uber-bears have been so shamed of late that most are afraid to come out and really bang the drum one way or the other (Gary Shilling excepted).
But now comes Tim Bond, head of asset allocation at Barclays, who puts his mouth where his money is. Tim’s full article in the FT is here. Here are the key points:
Economies recover much faster than most people think. “The average forecast for third-quarter US gross domestic product growth is a weak 0.8 per cent, which would be by far the slowest first quarter of any recovery on record. Since 1945, the average annualised real US growth rate in the first two quarters of recovery is 7 per cent. History provides abundant evidence that the deeper the recession, the stronger the bounce. Even the recovery from the Great Depression conformed to this rule, real US GDP grew 10.8 per cent in 1934 and 8.9 per cent in 1935.”
Asia is already seeing a v-shaped recovery. “[O]utput, employment and demand [are] all following V-shaped trajectories, and regional industrial production rapidly bouncing back above the previous peak. Yet this recovery is dismissed by western analysts, who appear unable or unwilling to believe the region is capable of endogenous growth.”
10% unemployment will not derail the recovery. “The 9.5 per cent US unemployment rate is also viewed as an obstacle…This objection ignores the many contrary examples of high unemployment rates and subsequent recoveries, not least in the US. Thus in 1982, US unemployment hit 10.8 per cent, yet GDP soared at an average annual pace of 7.7 per cent over the next six quarters.”
One reason unemployment is so high is that employers over-reacted, firing too many people. “[T]he large post-Lehman rise in US unemployment was a mistake on the part of panicky managements… Businesses, like markets, panicked after Lehman went under. Employment and output were both reduced far more than it turned out to be necessary, as businesses temporarily and understandably assumed a worst case scenario.”
De-leveraging is irrelevant: Private borrowing never drives recovery. “[I]ncreases in private leverage never play a significant role in recoveries. Indeed, since 1950, US private sector borrowing ex-mortgages has declined an average 0.1 per cent of GDP in the first year of recovery, with non-financial business borrowing declining 0.6 per cent of GDP.”
Consumers are now saving enough. “A regression of the household savings rate on the wealth-to-income ratio tells us the former has made the appropriate adjustment to declines in the latter. In fact, the rally in the stock market, the low level of interest rates and the stabilisation in house prices all tend to limit the risk of a further sizeable increase in the savings rate.” Read Tim Bond’s full argument here >
Put it all together?
V-shaped recovery, baby. (In Tim Bond’s opinion).
Either way, hang on to your hat!
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