All the talk recently over double dip recessions have scared investors out of the markets. Volume on SGX remains low reflecting the extreme caution amongst investors at this point in time. However, the irony I feel is that in 6 months time, it is very likely that nobody will be talking about a double dip recession anymore. The focus will shift to other things, and this will become just one of the many “scares” throughout this very jittery and uncertain year. But why am I so confident that a double dip recession is so unlikely?
If we go back into US history over the last 50 over years, the only double dip recession in the US since the end of World War 2 was 30 years ago in the 1980s and it happened when there was a second oil shock. That means that since 1950, over a period of 60 years, the US has had just one, one double dip recession. If we go back further, another known double dip happened in 1948, in the aftermath of world war two, and the great depression wasn’t a double dip recession, but instead, simply a prolonged 4 years of economic pain from 1930 to 1933.
Mathematically, these are very good odds that a double dip recession won’t happen because these seem to come very rarely. More importantly, we should look critically at what would cause a further drop instead of just thinking “what if there is a double dip recession?”
Firstly, the manufacturing sector. Now, this has actually been the sector that has helped to pull the US out of recession in the past, and this sector is not showing any serious weakness at this stage. The ISM manufacturing index has been steady growth with the index at over 55 for the last couple of months, and the latest for August, showed a very healthy 56.3, up from 55.5 in July. This as despite so many economists being so sure it would drop to 53 or below because, well, it was fashionable at this point in time to worry about a double dip recession.
Secondly, demand for oil and oil price. Now, this is directly dependent on demand and supply, unless we believe there is a huge amount of speculators playing the energy market and skewing it. If we are headed towards a double dip recession in US, leading to a double dip recession in the world, then price of oil should be plummeting back to 50 USD or lower since demand should be dropping like a rock. It hasn’t happened. Oil has been bouncing around 70 to 80USD per barrel since the start of the year. This shows that be it from people driving cars, companies using energy, but overall demand for oil is holding steady. The price of oil does not indicate a double dip recession.
Thirdly, yet another crash from the financial sector. This is the favorite whipping boy since Lehman Brothers because first US and then Europe had its financial crisis, originating from the finance sector. But again, we must understand, this is also the sector that has been subject the mother of all bailouts by central banks and governments plus starting in 2010 this year, has been subject to the most intent scrutiny by regulators amongst all sectors. They are getting the book and more being thrown at them with regulators going over with a fine comb any potential wrong doing, misconduct, or otherwise. Globally, regulators have been coming down hard on the financial sector, and this is in Asia as well. With this kind of backdrop of massive bailouts and intense regulatory plus self scrutiny, it is highly unlikely that the next crash will come from the financial sector. Look at the Asian financial crisis. It hit so many Asian banks back then, caused a huge amount of self policing and scrutiny from Asian governments, but till today, more than 12 years later, Asian banks are one of the most conservative with the strongest balance sheets globally and does anyone expect a crisis from them? I certainly don’t. Currently, with all the bailouts and such, the US banking industry is more highly capitalized at this point in time than compared to the past 20 years.
Fourthly, from the property market. The Europe and US property market could hardly get any worse at this point. Coming off a big crash in property prices and demand since 2008, the current base is already so low that property could hardly be the next trigger to a double dip. Property cycles are long, and it is possible that US property prices go nowhere over the next few years, but that in itself will not cause a crash or a double dip recession.
Ultimately, things have to get much worse for a double dip to occur, and within the current context, it is highly unlikely. The biggest suspects which caused a recession and crash in the past like the financial sector, property and oil prices are either already at such low bases in the US that they could hardly get worse, or like oil prices, have not been showing any indication that there will be a double recession. What has also been happening is that people have been focusing on the high unemployment rate in the US which continues to persist.
While this heralds continued pain to the US citizens, we have to look at this from the corporate perspective as well. This is happening because US corporates have “fired” a lot of staff and not hired them back. Companies have focused a lot on their bottom lines and this is also why despite the current environment, US companies are actually reporting good earnings growth. Based on consensus estimates, earnings of US companies are likely to grow 22.5% in 2010, 15% in 2011 and 13.9% in 2012. US companies are also cautious at this point in time, so they are not aggressively hiring, nor and they aggressively expanding (or lending money to expand). A lot of the crashes in the past happened when greed caused overlending, and overexpansion (Tech bubble, anyone?). This kind of scenario is just not going to happen at this point in time to US companies.
What this means is that over the next 6 months to 1 year, companies will continue to report double digit earnings, even while economic data and unemployment data remains flat in the US. But with nothing foreseeable that would cause the next big crash there, US won’t zoom into recovery, but neither will it lapse into another double dip recession. And investors will then eventually start to shift towards focusing on the company fundamental numbers. So, I predict that while it is the current in thing to talk about and worry about US double dip recession, few will be talking about it anymore after 6 months.
No comments:
Post a Comment