Handicapping the Global Economic Recovery
The obvious question must be begged: where do we go from here?
I don't profess to have a crystal ball, but to understand where we are we must appreciate how we got here. In no particular order, the following vibes have been discussed at length on Minyanville.com:
- We opined that we were in the Eye of the Financial Storm and that a "sovereign sequel" would follow the first phase of the financial crisis. (See: The Second Side of the Storm)
- We drew the distinction between corporate balance sheets -- which were largely repaired in the wake of TARP when they rolled debt and issued equity -- and the "egregious debt sandwich" that remained, with governments above and consumers below.
- There is a difference between a stock market rally and an economic recovery, and we've been given drugs that masked the symptoms rather than medicine that cured the disease. ( See: The Most Important Juncture in History)
- We offered that if we we're to wean ourselves off the synthetic government stimuli, austerity measures and upward taxation would be needed to get our financial house in order. Neither is pro-growth -- the sooner we're allowed to go through it, the quicker we would get through it.
- If we don't shift policies and alter our national direction -- or at least work together in a bipartisan manner toward a viable solution -- An Unfortunate Needle Points to War (although it may not require bullets). (See: Will the Next War be Bulletless?)
Sounds pretty dire, right? Perhaps to you... but for me, an eternal optimist constrained by a decade-long negative feedback loop, I've begun to see a light at the end of the tunnel that finally -- finally -- may not be affixed to the front of a train. And yes, I'll likely be early to that camp too.
It won't be an easy ride but this, in my view, is the early beginnings of a wave we've long been waiting for. I, for one, have begun to paddle much harder. That doesn't mean I'm proactively positioning quite yet, it simply means that I'm readying for it as others are running for cover.
I continue to believe that generational prosperity awaits us on the other side of this process of price discovery. We just need to get there, prepare ourselves for how long it will take, and allow for an ample margin of error in our approach, as well as our lives.
Of course much, if not all of the timing depends on the actions of governments stateside and abroad, the reaction of a population currently experiencing a secular shift in social mood, and the structural ability of the market itself to traverse through this next phase.
Given these unknowns, I foresee four potential scenarios:
The market is begrudgingly weaned off the 'drugs' and in the process, the "free" market will retest the 2009 lows. This could take two to three years, but allow for massive rewards in back half of this decade for those who proactively position.
We witness a global "reset" on the debt side that will unleash a litany of unintended consequences (such as counter-party contagion) while nuking the debt-laden elephant in the room (the political and private pressure against this will be intense, and for good reason).
We witness a currency shock that recalibrates trade relationships between countries and/or regions. We spoke about this over two years ago but were admittedly early with that discussion. (See: How Realistic is a North American Currency?)
We continue doing what we're doing (which is the definition of insanity), which could lead to geopolitical conflict on a grand scale -- but that's an entirely different conversation.
In short, the mirror image of the bearish scrimmage we got in front of the first phase of the financial crisis (when we offered that it would either be a car crash or a cancer) is upon us -- and that dynamic remains in play as we cast our eyes to the other side. I've never been accused of being a Pollyanna but I intend to slowly shift my stance as the masses wrap their arms around how bad it is and more importantly, why.
While I'm leaning towards a lean few years as a precursor to the phoenix that will eventually arise from this scorched earth, I'm at the very least seeing the seeds of a sustainable path -- and that's more than I could say for years on end.
And while I the entire financial global condition will likely get worse before it gets better, I look forward to adopting a more constructive stance as a matter of course and a function of time.
At the end of the day, being an optimist is entirely more fun as long as you're not in denial.
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