At the recent Art of Indexing Summit (October 28, 2009 at The Helmsley Hotel in New York City) Dr. Seddik Meziani, Professor of Finance & Economics, Monclair University solemnly declared, while the economic data offers a mixed bag, we’re still better off today than we were last year. He tried his best to paint a silver lining among persistent dark clouds.
Meziani told the audience of nearly two hundred trustees, fiduciaries and financial professionals of several interesting developments in 2009′s global economy. Emerging markets, devastated in 2008, have rebounded faster and quicker than their more developed counterparts. The professor believes such growth in emerging markets may have come about from robust population growth and a steady improvement of their standard of living.
With an increasing reliance on internal demand rather than foreign exports, these regions may have what it takes to grow organically. In addition, the old complaint about these markets – too much government intervention – appears to have become moot as both the United States and European governments have undertaken similar policies. With the developing countries racking up historic debt, emerging markets may actually prove more attractive.
Still, lurking dangers in the emerging markets have not disappeared. Many of these countries continue to have high debt (we’re just catching up to them), substandard accounting policies, weak disclosures, lingering government issues and, most critically, serious liquidity concerns.
On the other hand, the increased M&A activity and an increasingly bullish analysis in the established countries hints equity benchmarks might be returning to normal in the larger markets. But consumer debt, though off its historic highs of 2007, remains almost double its level of 1985 and nearly four times the amount we saw in 1952. Consumer spending (perhaps muted by this consumer debt) fails to support a long running stock recovery. Worse, traditional growth motors – the housing market and capital spending – are not expected to rebound anytime soon.
So, where have investors gone? The Monclair educator believes the bond market has been the primary beneficiary, citing the record $40 billion sunk into bond funds in August and noting we may have broken that record again in September. Yet, he fears too many have chased yield. When the economy improves, long duration bonds – and especially corporate bonds – will suffer worst. He advises investors to stay short.
Is the Recession About Over? Meziani, like any good economist, offers more than one answer. The cash for clunkers program certainly spurred the recent quarter’s GDP, but he questions whether rising unemployment won’t hold back any recovery. He blames four causes for continued unemployment:
- A poor credit market continues to hamper small companies – the historic source of job growth – so they’re not in a situation to hire people
- Expanded unemployment benefits actually encourage more unemployment
- People are coming out of retirement
- Homemakers are joining the workforce
Likewise, he points to four reasons why consumer spending will remain poor:
- Those who don’t have jobs can’t spend
- Those who do have jobs are more concerned with reducing debt
- Banks aren’t lending to small businesses
- Low consumer confidence
Finally, he warns that job recoveries from financial crises are traditionally slow (incidentally, this implies worse news for Europe). Overall, Meziani feel it’s a mixed bag of data, which is better news than last year. But there is good news – no longer are we in the fire, just the frying pan. He concluded by suggesting we might be in a sustainable recovery and we might be heading towards a W.
