While there is still quite of bit of pessimism and talk of gloom and doom swirling around the market and the economy, Barclays head of asset allocation Tim Bond is sounding positively sunny.
“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,” Bond writes in the Financial Times, citing several signs that we’re experiencing a “V” type recovery. “Over the rest of this year, the standard cyclical timing of a US economic turning point tells us pessimistic expectations are likely to collide with the economic reality of a strong recovery. The net result is almost inevitable, in the shape of an inexorable continuation of the equity rally.”
Bond says that the consensus today is that things are different this time — something he doesn’t buy. “The persistence of such pessimism is striking given a strong Asian recovery is visible, with output, employment and demand all following V-shaped trajectories, and regional industrial production rapidly bouncing back above the previous peak,” he writes. “Yet this recovery is dismissed by western analysts, who appear unable or unwilling to believe the region is capable of endogenous growth. That 2009 will be the second year in a row in which the increase in Chinese domestic demand exceeds that of the US is a point roundly ignored.”
Another fallacy in the pessimists’ logic, Bond says, involves unemployment. “Businesses, like markets, panicked after Lehman went under,” he says. “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. Just as global output is performing a V-shaped recovery, there is a big risk US employment will do the same, with monthly payrolls showing surprising growth by the end of 2009.”
Bond notes that unemployment isn’t a barrier to recovery — in 1982, US unemployment hit 10.8%, but GDP soared at an average annual pace of 7.7% for the next six quarters, he says.
But what about all the deleveraging now occurring? Another misunderstood data point, Bond says. “Increases in private leverage never play a significant role in recoveries,” he says. “Indeed, since 1950, US private sector borrowing ex-mortgages has declined an average 0.1% of GDP in the first year of recovery, with non-financial business borrowing declining 0.6% of GDP.”