Sudip Bandyopadhyay’s Blog

According to popular and probably unfounded belief, a Chinese curse wishes upon enemies that they may live in “interesting times”. Accursed or not, these times are nothing if not interesting. Policymakers have thrown away their maps and are leading us into the unknown. Each new initiative sets both markets and chatter aflutter, as people fret about whether new policies will get us out of trouble - or deeper into it.  This week did not lack for scares. On both sides of the Atlantic, growth figures were revised down: the US and UK economies both shrank by 1.6 per cent in the previous quarter. This has added to fears that the combination of quantitative easing and giant public deficits are putting the countries on a path of “Zimbabwefication”. Pundits have claimed to see the spectre of hyperinflation emerging from the torrents of red ink and helicopter drops of money.  Ramping up public borrowing at the necessary pace will inevitably be messy as debt managers and investors try to settle on the right mix of yields and maturities. And quantitative easing has barely even begun. It may or may not work; but surely it cannot fail until it has been tried. Hard as it may be for a public accustomed to constant news updates and instant gratification, this is a good time to suspend judgment and give some government policies time to work.  In the meantime, to lighten their mood, doomsayers should look to the more cheerful news from the equity markets. As their recent rally shows, they know that a failure of certainty does not imply the certainty of failure.
The next concern  Deglobalisation: ugly word, scary concept and now painful reality.  The World Trade Organization estimates global trade will drop by 9 per cent this year, its biggest decline since the second world war.  Given that trade was growing at a 6 per cent clip only 15 months ago, the fall is so abrupt that some now worry about the return of Smoot Hawley, the US tariffs law that made the 1930s depression Great.  That is alarmist.  Much of the recent reversal in the global movement of capital, goods and jobs has been directly due to the financial crisis.  It has been the collapse in demand, not protectionism.  There are dozens more such cases.  Yet the effects of such incipient protectionism have been small, so far.  Will it say that way?  Reasons to be hopeful include the WTO and the treaties that bind the members.  Companies, even those producing for domestic markets, are more dependent on imported inputs than ever before.  Exporters also have more political heft.  This changes the politics of protectionism.  The “Buy America” programme was watered down.  And, in Brazil, private sector outrage that followed an attempt to impose import controls led to their removal.  That is encouraging.  Even so, protectionism could rise as the recession worsens, putting governments under pressure to protect jobs at home.  Indeed, anti-subsidy duties, and dumping rules, imports banned in the name of health, safety or the environment – all these are WTO-legal.  Eight decades ago, many sensible people opposed the Smoot-Hawley bill; 1,028 economists petitioned against it, as did Henry Ford.  Yet still the unfair & inappropriate  bill was passed.  Free traders everywhere cannot drop their guard.

The current economic environment will eventually improve. Pent-up demand will one day seek out cheap assets, hopefully assisted by easily available credit, whole run-down inventories will need to be restocked.  It is important to appreciate this in order to achieve long-term financial goals.  To take the view that there will  never be another economic cycle seriously damage your expected wealth, if the result is to consign oneself to defensive assets on a multi-decade basis. This is probably the most challenging environment many in the financial community and private investors have faced.  But there will be a recovery when risk assets once again  outperform defensive assets on a consistent year-on-year basis.  Watch those signals!