An English fund manager was offering stock tips on a television channel. The best investment strategy for 2009, he advised was to buy a crate of scotch and retire to a cave in Wales for the rest of the year. The same fund manager on the same channel a few weeks ago and he seemed his usual witty self, had obviously not retired to a cave and was talking of the green shoots of recovery.
This is not meant to be yet another mildly annoying story about the fickleness of investment advisers. To be fair to our television friend, the wild swing in his views reflects, to a degree, the rapid pace change and volatility that have buffeted the global economy over the past few months. There is certainly much more optimism than in January, reflected in an up tick in stock indices around the world. From their February lows, the Dow Jones is up 15% the London FTSE by about 10% and our Sensex is up be a healthy 30%.
Financial markets have their own idiosyncrasies but they cannot de-link completely from the economic realities on ground. Thus the up tick reflects the perception that economies are recovering and the worst of the crisis is behind us.
A quick review of the changes in the global economy over the past three months might be useful. The US central bank (the Fed) and the Bank of Japan have dropped their policy rates to zero with the British and European central banks close on their heels. India’s Reserve Bank has cut the reverse repo rate (the short term policy rate) to an unprecedented 3.25% with more cuts likely.
Central banks have not been content to drop rates alone. They have been buying back large quantities of bonds from banks, offering freshly printed money in exchange. This infusion of cash, low rates and the fact that banks have begun to trust each other again has meant a thaw in inter-bank markets and downward pressure on lending rates. The 30 year Jumbo American mortgage finance rate, the benchmark housing finance rate in the US has dropped by about one and quarter percentage points since October last year.
There has been fiscal stimulus as well. The US government’s massive fiscal package went through in early February and involves a government hand out of about $800 billion on a motley mix of tax breaks, project spending and unemployment benefits. While the stimulus is designed to bulk of it is concentrated in 2009 and 2010 while it is too early to judge its efficacy, analyses of the first three months of its inception are quite encouraging. China also has a rather hefty stimulus in place.
There have been other quasi fiscal policies to complement these conventional measures. The American government has put together a plan to restructure the car companies badly battered by the recession and also seems to have a workable strategy to purge bank balance sheets of their dodgy assets.
Macroeconomic data seems to pick up some of the policy impact though it must be pointed out that one has to look really closely to notice the improvement. The manufacturing sector might still be contracting in the US and most of Western Europe but the rate of contraction has diminished. Prices are still falling but the speed of the fall has slackened. Monthly home sales data (remember the US housing market was the epicenter o the crisis) have turned from uniformly dismal to occasionally encouraging. Those looking for bad news though don’t have to try too hard. Unemployment in the developed economies is high and continues to rise.