Have we just woken from a nightmare, or are we still asleep?
Sydney Morning Herald
Saturday August 22, 2009
OK, so maybe I'm the only person in the world who thinks nothing makes sense. Every day the sharemarket surges to new heights, ignoring a collapse in corporate earnings, focusing instead on vague promises of blue skies ahead.A couple of months ago we were on the brink of a global financial meltdown. Unemployment was soaring and international trade had fallen in a heap. Battered into submission, sharemarkets responded by slumping to their lowest levels in years. That was March.Five months later, apparently it's all good.The financial meltdown? Just a bad dream.If, like me, you are up early enough in the morning to watch the close of Wall Street trading, it is difficult not to get caught up in the euphoria. You may just believe all those New York stockbrokers and their endless patois of "We're now in a bull market. It's time to buy."You know what? It's a load of bull.If you trade on a long-term horizon, prices may now represent good buying. But this is not a bull market, so don't expect a stock purchase today to guarantee instant wealth and fabulous profits.What is happening now is that we are recovering from fears €“ well-founded fears €“ that the entire financial system was on the brink of collapse. Narrowly avoiding a fiery hell, however, is no guarantee of a free ride to heaven.Just take a look at the statistics being published around the globe. Unemployment is rising. Economic activity is slowing. Corporate earnings are falling.It is true that the speed at which all these things are happening is slowing. But that does not mean improvement or recovery. It simply means things are not deteriorating as quickly as before.Anyone who has lived through a proper recession knows two things. The first is that each recession is caused by its own unique circumstances €“ which makes it difficult to apply a one-bandage-fits-all-wounds approach. The second is that despite any statements from politicians, stockbrokers and spruikers with a vested interest, it takes years to fully emerge from an economic downturn.The financial Armageddon we narrowly avoided had a couple of unique traits. It was more severe than your garden variety recession. And unlike other crises it was a failure of the financial system.Ordinarily, governments are loath to become involved in corporate bail-outs during a crash. That's the risk shareholders take. That's what capitalism is all about.A crash causes a collapse in equity values and a loss of employment. Painful as it may be, it is vital for markets and economies to go through that adjustment process, to endure the pain in order to lay the foundations for a true recovery.Unfortunately, that has not happened. The lack of pain €“ that absence of a sharp jolt €“ has created a false sense of security.There have been some heartening developments from the crisis. One of the most positive was the co-ordinated response from governments and the speed at which they were able to join together to combat a potentially lethal problem.Economic stimulus packages were unleashed simultaneously across the globe €“ from the US to Europe and China. John Maynard Keynes would have been proud, because the measures worked, limiting the most debilitating effects of the recession.But what those stimulus packages also did €“ as part of the concerted government response €“ was prop up the institutions that caused the collapse in the first place. And that's where we potentially create future problems.No government will allow its banks to fail. They may let one go under €“ if it is relatively insignificant in the scheme of things €“ as a lesson to the rest. Think Lehman Brothers. But there is too much political and economic fallout from the mass collapse of big lending institutions.As a result, very few shareholders in those banks have felt the pain from mismanagement of the companies in which they invested.Instead, the losses and the future risk from the financial sector have been transferred from shareholders to taxpayers, to the general public. The risk has simply been spread. And it has been spread to sections of the community that can least afford to carry it.Transferring pain does not obliterate it. At best it has been delayed. At worst it has been swept under the carpet.And if there is an historical precedent to all of this, it can be summed up in one word. Japan.In the 1960s Japan was the emerging giant. In the '70s it was all over the place, supplying the world with cheap products. In the '80s, it was buying up resources and production facilities. And then it all went horribly wrong.A real estate boom at home. Domestic banks that went crazy, dishing out loans like there was no tomorrow to feed that property and corporate expansion boom.The bubble burst in the early '90s. But Japan's banks were allowed by the authorities to soldier on, pretending everything was OK and never writing down the value of their dud loans.Japan never really emerged from that recession. Let's just hope we don't fall into the same trap.
© 2009 Sydney Morning Herald