Thursday, July 23, 2009

Economy Set For V-Shaped Recovery

i Capital has, unlike many others, been expecting a V-shaped economic recovery and that the global equity markets are on the verge of a major bullish reversal.

i Capital is not saying these optimistic views for the sake of being a contrarian or for cheap publicity. i Capital is doing so because the objective research and analysis points that way. i Capital is convinced that many are confused by the cause-effect relationship and missed the role played by the Lehman Panic.

Many have compared the present US-led financial crisis with the 1929 Great Depression and worry that the world economy is heading that way. There are, of course, some similarities between now and the 1929 Great Depression. But there are even more substantial differences.

A major difference that the current situation presents is the presence of a strong China, whilst there was no strong major economy in the 1929 Great Depression.

Nevertheless, comparing the two periods in such a superficial manner is futile. What is important is to establish the cause-effect relationship. What caused the 1929 Great Depression? What is causing the current steep economic contraction?

The causative factors for the two periods are very different and many economists, professors, analysts, investors, etc have mixed all of them up. In the case of the 1929 Great Depression, the plunge in the New York Stock Exchange in 1929 was not the cause.

It was essentially a series of major policy mistakes that caused a normal recession to become the Great Depression. The major policy mistakes created a downward spiral, as one policy mistake reinforced the mistake of another.

Often the responses from the various governments throughout the world were slow in coming and when they finally came, they created more harm than good.

The situation now is very different. The governments and authorities are panicking and responding in the right manner. The one vital policy mistake in the current situation was caused by not rescuing Lehman Brothers. The United States has since then been trying to undo the rapid damage caused by the Lehman Panic.

In fact, there are increasing signs that the world economy is quickly stabilising and that the global equity markets would soon be anticipating a global economic recovery. Too good to be true?

US retail sales are recovering. Even the US housing industry, which no one expects to ever recover is now on the mend. New and existing home sales have risen. Affordability has reached record levels. Even the US durable goods orders, the mother of all sensitive economic data, are recovering.

In addition, many major global banks have reported that business since early 2009 has been good. More importantly, China’s economy is already humming along fine, so fine that a second stimulus package is not needed. The mass media keeps harping on the fact that China’s economy has slowed from a growth rate of 13%.

What is left out in the reporting is that the 13% growth rate is the abnormal rate and not the normal state of affairs. At 13%, China’s economy was overheating and needed to be cooled down. The more normal growth rate for China is 7%-9%, which 2009 will most likely produce.

Instead of worrying and fearing Great Depression 2, investors should mull over the chances of a synchronised global economic recovery, leading to a V-shaped recovery. As i Capital has been asking, are you ready for a rally?

The i Capital Long Boom is alive and kicking, courtesy of China’s sustained economic development. In this Long Boom, which by the way does not preclude panics, recessions, bear markets, etc happening along the way, the world economy is driven substantially by the transformation of China’s economy. This is the main catalyst.

At the same time, enabling the i Capital Long Boom are two other important developments. One is globalisation, which every country now knows is extremely vital to keep intact. Two is the computer/Internet revolution, a revolution that throws up open-ended possibilities and is still in the early stages.

Magnifying the impact of China’s economic transformation on the global economy is the iterative benefits from CLEB, aka the China-led Economic Bloc. China’s economic development pulls up the economies of the rest of the world. Through higher commodity prices, economies from all corners of the world enjoy better standards of living. Lower prices for many manufactured products benefit consumers from all over the world too.

China’s economic transformation has both inflationary and deflationary impacts. Which prevails at a particular point in time depends on a wide range of factors.

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