Dark Clouds and Silver Linings Intertwined
— by Inya Ivkovic, MA
There is no way of describing the green shoots seen lately as globally synchronized recovery. Indeed, we are still as deep in the recessionary woods as we could possibly be. True, the somewhat positive economic data are boosting consumer, business and investor confidence as of late, which is telling us that whatever we envisioned back in the first quarter of 2009 has not, mercifully, come to pass. However, the dangers are still on the horizon; they have not yet retreated or retrenched and they can still cause the recovery to sputter out.
During the Great Recession, policy decision, financial markets, economic output, and sentiment have converged in a very dynamic way. Monetary decisions have had a direct impact on the credit and financial markets. Fiscal and monetary stimuli have worked hard at building consumer, business and investor confidence. The effects included the elimination of extreme economic tail risk, which, in turn, resulted in reduced volatility, particularly in the stock markets. Corporations did their part as well. They adapted quickly to the changed economic environment and created better-than-expected earnings in the first quarter and especially in the second quarter of 2009. The flip side of that coin was the rapidly rising unemployment. The corporations’ tightening of the belt signaled to creditors that their belts should not yet be loosened either. And finally, Americans realized that the days of drunken millionaires were over. After spending years at unsustainably low levels, the U.S. savings rate rose to a six-percent rate, not seen in quite some time. By all means, dark clouds and sliver linings wove an interesting tapestry in 2009.
What is still difficult to understand, and where most dangers lie, is not the short- or long-term outlook, but what’s in between. Or, what will happen in the medium term with the global economy once world governments stop pouring money into global financial systems, or at least once they scale it back. Everyone understands that the current rate of dispensing government help cannot continue indefinitely and no one wants to think about the time when the final bill will come due.
Additionally, economists worry that medium-term inflation may increase substantially as a result of a year of massive bailouts. There is also the fact that the signs of economic growth we are seeing lately are nothing more than an exaggeration caused by swings in inventory levels. Namely, as the recession deepened, many inventories had to be scaled back, only to be restocked in the spring of 2009. So, what was new economic activity and what was simple catching up become indiscernible. Finally, world trade and principles of globalization became challenged, as the fine balance was threatened by sprouting nationalistic policies.
In my humble opinion, inflation in the short term is not a concern. However, in the medium term, it could very well rear its ugly head, which also means that a prudent investor should prepare himself for it by reviewing his portfolio and considering investing in traditional inflation safe havens, such as gold.