Monday, June 22, 2009

... the Great Escape? Or the Great Deception?

In an earlier post, I commented on the now famous "Green Shoots" of recovery but the very real long term threats to continued economic growth. It turns out that the "so-called" economic recovery seems to be more of a financial market recovery. Conventional wisdom goes that the financial markets turnaround precedes the real economy turnaround by about 6 months. Early signs did point to this phenomenon. Market indices in both emerging markets and the developed markets showed smart 30%+ growths in the last 3 months. Corporate bond offerings began to surge and even below investment grade offerings jumped up (and were well subscribed) in June.

However, some temperance seem to have set in of late. Emerging market indices like the Sensex and the Hang Seng are at least about 10-15% down from their early June peaks. Likewise with the DJIA. The steady upper trend seen for the best part of the last 8 weeks seems to have been interrupted. The yield on 10-year US treasuries had gone up to nearly 4% but is not trended back down to about 3.5%, basically signalling that everything is not as hunky-dory as we expected. There is still a high demand for quality (the irony of it all is that quality is denoted by US treasuries!). The Economist states that all economic indicators have not magically turned to positive, which is what one would expect if the markets and the media are to be believed. According to the Economist,

The June Empire State survey of manufacturing activity in New York showed a retreat. German export figures for April showed a 4.8% month-on-month fall. The latest figures for American and euro-zone industrial production showed similar dips. American raw domestic steel production is down 47% year on year; railway traffic in May was almost a quarter below its level of a year earlier. Bankers say that chief executives seem a lot less confident about the existence of “green shoots” than markets are.

We shouldn't be either. For a bunch of reasons.
1. Losses are nowhere close to bottoming out. Expectations for large credit defaults amongst corporates is expected to be higher than 11% for 2009 and continue to remain there for 2010.
2. At the individual level, unemployment is showing no signs of abating. There was a good article in the Washington Post today on how the economic recovery seems to be taking place in the absence of jobs. Check this link out. Unemployment is expected to be north of 10% and remain there for a good part of 2009 and into 2010. Unemployment is closely linked with the consumer confidence number and therefore any sluggishness in the job market is going to impact consumer spending and therefore further impact the rate of recovery of the economy.
3. Emerging markets were the promised land for the world economy, not not any longer. The markets don't seem to think so however. Indian economic growth is expected to be the slowest in the past 6 years. With much more fragile safety nets in the Asian economic tigers, these economies are going to be even more careful while navigating out of the downturn.

In short, a long haul seems clear. Also seems clear is a fundamental remaking of industries as a whole. Financial services, automobiles and potentially health-care are industries where a new business model is ripe for discovery. This should create many more opportunities for the data scientist, the topic of my next post.

1 comment:

Anonymous said...

It does seem clear that emerging markets (BIC) are going to be leading the global economy out of the hole it finds itself in. Though nobody expects the rebound to be even, the signs so far seem sustainable.