Just one in 20 money professionals believes that the economy will stage a sharp "V-shaped" recovery from the current slump, according to a survey by Barclays Capital. When the investment bank asked experts what they expected the trajectory of the global economy to be this year and next, 37.5% predicted a W-shape – temporary recovery, before renewed weakness – and 31.5% a U-shape, representing weak growth for some time before gradual recovery. Another 26.5% favoured the L-shape: growth remaining weak for a protracted period. Just 4.5% opted for a V-shape – weakness and then sharp recovery – according to the survey of 605 professionals, who worked for a broad range of foreign exchange investors including hedge funds, real money managers, proprietary trading desks and corporates. – UK Telegraph
Dominant Social Theme: Concern in the real world.
Free-Market Analysis: We agree with the money professionals in London. The current dead-cat bounce is not a prelude to economic rejuvenation. We favor the U-shaped scenario. Or maybe the L-shaped recovery. We are not trying to disparage the green shoots. But we don't see them.
Central banks stimulate the economy by printing money. This causes a boom and then a bust – once people figure out they've been fooled by the easy money. They're likely left invested in a lot of stuff that won't ever turn a profit. And as the economy sinks, the proverbial scales fall from their eyes. With a gasp, they comprehend the damage they have wrought to themselves and their investors. And then, these days, often, they turn to government with hands outstretched.
And, nowadays, Western governments seem prone to provide what is requested. Thus it is that the most damaged firms, if they are big enough, receive the most funds. Trouble is, you can't re-inflate a busted bubble by printing more money and shoving it at the mal-investments. A mal-investment is just that, and once the bubble has burst, everyone sees what's gone wrong. The mal-investment has therefore lost its value. Or if it does retain a little bit of value (simply by sticking around) then the additional money attracted to it will likely also be wasted.
And that is why there is not going to be a real recovery any time soon. Too much reflation going on. Too many sour enterprises on life support. It is one thing to print electronic money and distribute it to banks. Some of that money doubtless finds its way to the stock market, causing the proverbial dead-cat bounce. But in a way, the monetization only divorces the financial economy from the real economy. Not a good idea.
Until the real economy itself is allowed to work out the mal-investment, the financial slump will continue in some form or other. Funds that would be used to create new and more realistic endeavors will instead find their way into sour companies propped up by governments and central banks. Employment will remain weak. The recovery (even if it begins, mildly) will never fully take place because the shake-out has not been allowed to happen.
Yes, there is so much paper money sloshing around the world that sooner or later some sort of industrial uptick may take place. But how powerful can it be? Financial strategist Richard Maybury (this coming Sunday's special guest interview) defines a recession as what you get when you short-circuit a depression. Good point. A recovery of some sort, if it does manage, will be hailed as a miracle of financial foresight. But you can't just keep patching the balloon and blowing it back up.
Are we off the beam? We suggest you look to gold and silver prices as a barometer of what's really going on. As long they're going up, the crisis ain't over. Maybe that's one reason they call it honest money.
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