Recently, global stock prices reached their peak for this year as they were popped up by optimism about prospects for a worldwide economic resurgence. However, this week saw stock prices dropping back to a three-month low as fresh concerns cropped up regarding the sustainability of the economy’s recovery.
Will the global economy continue its resurgence or will it hit a brick wall? A team of esteemed experts was empanelled to answer this query and to shed light on what lies ahead in the months to come: inflation, stagflation or deflation?
Anthony Rowley, a correspondent of The Business Times, started out by asking whether the global economy is truly on the mend. “Is the apparent recovery in the global economy for real, or a ‘phony’ one? And, are stock markets justified in behaving the way they have been doing lately?”
Ernest Kepper, once a senior official at the International Finance Corporation and now the head of an Asian financial consultancy, was sceptic about the economy’s resurgence. “This is a phony recovery. A turn-up in the economy is not the same as the economy recovering all lost ground. To keep rising in the future, markets need a sign of real economic recovery, and that requires a surge in consumer spending, business investment and home buying, combined with a reduction in government spending,” the former Wall Street investment banker said.
“I fully expect to see the markets rise for a while longer, even as high as Dow 10,000 or S&P 1,100. After that, I think that we are going to see another leg down when the current rally ends, just as the powerful rally following the initial crash in 1929, ended up dealing out severe losses to those who held onto their shares,” Kepper added.
Rowley asked if any of the panellists were optimistic about the global outlook. Robert Lloyd-George, the chairman of Lloyd George Management, echoed Kepper’s theory that the apparent recovery is not for real, but said that some sectors are truly recovering. “This is not a ‘phony’ recovery. It may be slower and weaker than usual because of the debt super-cycle. But it is a real recovery – in trade, auto sales, consumer spending, corporate capital spending and so on,” he said.
Mark Mobius, the executive chairman of Templeton Asset Management, said that some signs hint at resurgence. “The financial crisis was real in the banking system but not in the industrial economy. It impacted the economy because the banking system froze. However, markets are leading indicators and they are telling us the recovery is on the way now.”
Jesper Koll, the president and CEO of Japan’s Tantallon Research, was also optimistic. “I agree. There is nothing ‘phony’ about the recovery; globally, the policy response was swift and massive and very correct. Since the start of 2009, slowly but surely, global money and credit have started to flow again.”
When asked whether deflation or inflation lie ahead, Christopher Wood, an equity strategist, said, “The risk in America and the West remains deflation. There remains almost zero evidence of re-leveraging in America.”
Mobius then explained that inflation might have good or bad implications. “Inflation is good for equities but not for bonds because bond rates must go up. Depending on how fast the money supply brakes are applied then the impact on equities could be positive or negative.”
Rowley’s last question was about what might hinder the global economy’s recovery. “What could go wrong to derail the present recovery?”
Mobius answered, “Money supply has had fed the markets. Excess money supply begets inflation and that is what could go wrong but that is something we don’t have to worry about for probably another year.”
Lloyd-George worried about the heightened level of debt owed by the European governments but said that it would have no effect on Asian markets.