On Thursday evening the world’s most-watched stock index, the Dow Jones industrial average was hovering a mere 68 points above the magical 10,000 mark. The other two gauges of American temperature, the Nasdaq and the S&P 500 were both following similar trends - down all the way.
Closer to home the JSE has receded rather rapidly from its overvalued levels around 28300 just two weeks ago to a more respectable 26300, also stuck in a clear downward trend.
Across the globe all major indices are reflecting a similar downtrend. Despite all the hot air emanating from American market watchers, it seems the real economy has begun the process of reeling in the overgay financial markets. The reality of reduced company earning, the down-tuned earnings forecasts and the resilient growth in US unemployment, are now finding a more discernible mark in equity markets.
I believe the entire world’s financial services sector is holding its breath in anticipation of which way, ultimately, markets will go. Unfortunately I have only one answer: They will continue, medium to long term, to go down, until that point, maybe towards the end of this year or in the first half of next year, that the world economy establishes a new equilibrium and find the so-called “new normal.” In the short term, they will continue to hop up and down, making speculators happy but ruining the future for everybody else.
Lately I have been accused of being a terminal bear and of actually contributing, with a host of others, to write markets down. This is not exactly true, but I have to admit, my view does lend itself to a negative interpretation, especially by permanently over-optimistic traders. It is rather flattering when another analyst accuses one of being able to influence the market. But I have to say that I do not for one moment believe I can influence the local market in any way, let alone have an impact on events beyond our borders. Rather I think it is a case of the number of people applying common sense to make sense of economic conditions, have declined to such a low level, that any analyst who applies his mind, is branded a bear. Indeed, it is not so. It is mere a matter of fundamentals. You cannot escape their overriding influence indefinitely. Always, at some point, the fundamentals assert themselves, often in a painful and destructive manner, especially if they have been disregarded for too long by the main stream.
For the record let my try to recap my views in a short, concise snapshot view. I think we have moved past the most dangerous phase. I think volatility will remain with us for at least another 2 years but the current deleveraging process will continue for another 4 years. I really do not give a damn whether the entire American financial system crumbles and implodes but I am very sensitive to the hardships that we shall see in Africa, were that to happen. So, in short, I sincerely hope it does not happen. I further realise that, thanks to a decade of unprecedented globalisation, we cannot escape the effects and the fallout of a world calamity, even if we wanted to. Thus, ultimately, it is in my interest, just as much as it is in the interest of the ordinary Greek, or Latvian, or whatever, to see stability return to world markets, and to stay. And if it means the new normal is a couple of notches below the market excesses of the past, or even miles below the high points, then so be it. Just let us return to a stable, predictable economic environment. Without stability, no prosperity, at least not on a national level and for nations as a whole.
On the domestic scene, I expect economic prospects will remain positive but only marginally so. If we see a 2% growth in real GDP this year, we should regard it as respectable. If South Africa sees a 2% growth, they should be ecstatic. Despite all the hype surrounding the 2010 Fifa Soccer World Cup, I believe it will only help the African powerhouse to achieve break-even, as other economies around the globe remain stuck in negative territory, especially if the base effects of the very lows we have seen, start fading out in the statistics. Last year was a year of calamity. Do not pay any attention to the positive growth posted in the US for the third and fourth quarters. These were mostly statistical. If you fall over the cliff and hit the rock, every inch up, is seen as progress. This is what happened in America and Europe. All positive indicators are largely the result of a new statistical base, not of growth.
In Africa my advice is that we must remain vigilant and defensive. China can only hoard so much copper or any other commodity. The credit cycle of the past 20 years have finally come to an end. From now on, growth will be based on real production and American consumers will only buy what they can afford. Keep the belts tightened until I advise you that I think we have established the new normal.