Sunday, January 17, 2010

Stimulus Induced Growth - Is It Global Recovery On Steroids?

In the first half of 2009 stimulus packages were injected into economy of each country, which managed to perk up the respective ailing economies from the brink of recession. This shot in the arm has been eloquently described by many economists as equivalent to keeping the world economy on steroids. I won't mind going along with such succinct description of the present state of global economy. The economic recovery from Mar 2009 low is definitely because of the steroids pumped into each nation's economy. And as it always happens with pumping steroids, recovery has been really spectacular. So spectacular has been the global economic recovery that one cannot be faulted for being believing that global economy has made a V-shaped recovery. But this is where one should draw the line. Stop and think - rationalize! Someday sooner than later, effect of steroids is bound to wear off. What happens then???

Simple! We all know the answer. If you revive a critically ill patient with steroids, then the patient develops steroid dependence. This means that you have to perforce keep the patient on steroids forever, otherwise the patient will collapse. Which implies that Governments across the globe will have to keep their respective economies on stimulus package forever, if they don't want a collapse of their economy. That is again not feasible. How much money can the governments print? Ultimately what will the value of such money? Hyperinflation as we see in Zimbabwe - is that what we are aspiring for?

Obviously the answer is that at some point of time stimulus packages will have to be withdrawn. However, what is to be seen is whether the magical carpet of stimulus package, on which most economies are presently floating, is yanked off at one go or their governments judiciously take the patient off steroids in small baby steps. Former scenario will definitely cause immediate death to any economy, while the latter prescription will only cripple an economy. So even if we take the best case scenario of gradual and judicious withdrawal of stimulus package, we still cannot sit smug with a misplaced notion of V-shaped recovery continuing, as in a structural bull run. If anything, do tighten your belts because we are about to witness a roller coaster down-ride of global economy, which will remind one of bungee jumping or free falling from super-high-rise structure.

As far as the fundamentals are concerned, US economy will have to witness a double dip recession. Apart from creating more asset bubbles in global markets, US stimulus package has achieved precious little fundamentally for its economy. On the other hand, emboldened by stimulus money US financial institutions have already started distributing hefty bonuses and compensations amongst its employees. For them its business as usual again, even though President Obama reprimanded them sternly. On Wall Street financial institutions devise newer and more complex financial instruments to stun the world with, like the case of short selling of mortgages, while the man on the main street is still reeling under massive unemployment. With double digit unemployment, consumption obviously cannot pick up and hence the main driver of US economy is dragging it backwards.

If US consumerism does not look up soon, then China is going to have it real rough. Fashioned on export-driven model, Chinese economy will soon be sitting on massive inventories with no place to sell. For about two decades plus Chinese economy has been witnessing runaway success owing to massive exports to US. China has a huge trade surplus with US, so much so that outside of US, China holds maximum US dollars. China is the biggest creditor of US. If US cannot revive its jobs' market, then the consumption data will not pick up. That means that US will be importing incrementally less goods from China. Now you can imagine what China will do with the huge piled up inventories. It cannot even spur up its internal consumption since the wages are very low - as low as one tenth of Japan. And with easy credit there is inflationary pressure of bubble proportions already building up there in many asset classes, like real estate. Time is running out for China. Ailing US economy has become akin to a millstone around China's neck.

Now you only decide - if two most powerful economies of the world are in dire straits, can we expect a structural global bull market? Isn't it more prudent to assume that global markets will witness another bout of bear hug? Its time to be cautious if you are a trader. If you are an investor then wait for mouth-watering levels to enter trade. Year 2010 will be a difficult year to negotiate both for investors and traders. But if you are playing the Indian stock markets then be rest assured that Indian markets are firmly in structural bull run. Which means that even as an investor at current level, you are assured of decent profits in fundamentally sound companies in one year's time. Indian markets will correct but they will recover quickly to surpass their all time highs in a year's time. That cannot be said for most of the other global markets, barring those emerging markets not heavily dependent on US exports. Apart from BRIC nations, MAVIN countries are coming on global investors' radars. Happy investing!!