Another Calm Before the Storm?

It almost seems remarkable that many equity markets – admittedly with a few notable exceptions such as China – are up year to date despite the onset of a deep recession in global trade, the continuing crisis that is occurring within the Euro and even the US’s apparent inability to achieve what some might regard as an ‘escape velocity’ in its recovery from the Global Financial Crisis.   In fact, in each country or region, we find that there is a remarkably common factor constraining their recoveries, namely a lack of real income generation or underlying productivity growth but despite this ‘problem’, financial markets have generally prospered.  Indeed, one could almost be forgiven for believing that the asset markets are occupying a very different world than the real sectors of the economy, given their obvious divergent experiences so far this year.

Certainly, the optimism with regard to the outlook for the real economies that prevailed in many places during the first quarter of this year has been proved to have been ill-founded.  In fact, we suspect that this optimism, which was largely fostered by the media and the financial markets themselves, may actually have done harm to the global economy by encouraging companies to increase employment and production in anticipation of a revival in global demand that simply was not likely to – and did not – materialise.  Hence, particularly in Europe and Asia, this increased production went unsold and companies now have significant levels of goods that they cannot dispose of in the still weak current environment.  Consequently, production, employment and trade trends have weakened around the world as companies have sought to adjust their bloated inventory levels and ratios.